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Inflation targeting and financial crisis

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  • Di Gong
  • Zongxin Qian

Abstract

We study the average treatment effect of inflation targeting on the likelihood of financial crisis with a large panel of countries over 1980–2017. To address the self-selection problem of inflation targeting, we adopt propensity score matching. Various matching estimators show consistent evidence that inflation targeting has significantly reduced the probability of a financial crisis. When decomposing financial crisis into various types, the effects are pronounced for the banking crisis, inflation crisis, external debt crisis, and stock crash. Our results are largely unaltered to a battery of robustness checks when controlling for legal origins, governance quality, financial development, capital account openness, fiscal balance, debt-to-GDP ratio, financial regulations, and central bank independence. This paper suggests that price-stability-oriented monetary policy frameworks, such as inflation targeting, also have non-negligible ‘side effects’ on financial stability.

Suggested Citation

  • Di Gong & Zongxin Qian, 2022. "Inflation targeting and financial crisis," Applied Economics, Taylor & Francis Journals, vol. 54(41), pages 4782-4795, September.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:41:p:4782-4795
    DOI: 10.1080/00036846.2022.2036685
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    Cited by:

    1. Goran Petrevski, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," Papers 2305.17474, arXiv.org.
    2. Bambe, Bao-We-Wal, 2023. "Inflation targeting and private domestic investment in developing countries," Economic Modelling, Elsevier, vol. 125(C).
    3. Petrevski, Goran, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," EconStor Preprints 271122, ZBW - Leibniz Information Centre for Economics.
    4. Bao-We-Wal Bambe, 2023. "Inflation Targeting and Private Domestic Investment in Developing Countries," Post-Print hal-04227639, HAL.

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