The Impact of an Inflation Targeting Framework on Food Price Inflation: Evidence from Developing Economies

Abstract

Inflation Targeting (IT) has gained much popularity in recent years, with fifteen countries formally adopting it as a monetary policy framework since 2000. However, in developing countries, where the contribution of food prices to headline inflation is generally higher than in advanced economies, the adequacy of an IT framework for curbing inflation is very much contested. In this paper we use a difference-in-differences approach to evaluate the treatment effect of adopting IT. Controlling for reversion to the mean, we find that economies that function under an IT regime do no better than countries that use alternative policy instruments. We verify the robustness of these results using panel unit-root tests and find that food inflation rates converge across economies irrespective of the monetary policy framework implemented.