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The Effects of Inflation Targeting for Financial Development

Author

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  • Geoffrey R. Dunbar
  • Amy (Qijia) Li

Abstract

The adoption of inflation targeting (IT) by central banks leads to an increase of 10 to 20 percent in measures of financial development, with a lag. We also find evidence that the financial sector benefits of IT adoption were higher for early-adopting central banks. Our results suggest that roughly 12 to 14 years after the Reserve Bank of New Zealand adopted inflation targeting in 1989, the benefits for financial development for new adopters of inflation targeting may have been negligible.

Suggested Citation

  • Geoffrey R. Dunbar & Amy (Qijia) Li, 2019. "The Effects of Inflation Targeting for Financial Development," Staff Analytical Notes 2019-21, Bank of Canada.
    • Handle: RePEc:bca:bocsan:19-21
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    References listed on IDEAS

    as
    1. Fazio, Dimas M. & Tabak, Benjamin M. & Cajueiro, Daniel O., 2015. "Inflation targeting: Is IT to blame for banking system instability?," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 76-97.
    2. Creel, Jérôme & Hubert, Paul, 2015. "Has Inflation Targeting Changed The Conduct Of Monetary Policy?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 1-21, January.
    3. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1521-1538, November.
    4. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, April.
    5. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," International Journal of Central Banking, International Journal of Central Banking, vol. 1(3), December.
    6. Jerome Creel & Paul Hubert, 2008. "Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK," Documents de Travail de l'OFCE 2008-25, Observatoire Francais des Conjonctures Economiques (OFCE).
    7. Ardakani, Omid M. & Kishor, N. Kundan & Song, Suyong, 2018. "Re-evaluating the effectiveness of inflation targeting," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 76-97.
    8. Creel, Jérôme & Hubert, Paul, 2015. "Has Inflation Targeting Changed The Conduct Of Monetary Policy?," Macroeconomic Dynamics, Cambridge University Press, vol. 19(1), pages 1-21, January.
    9. Lin, Shu & Ye, Haichun, 2007. "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2521-2533, November.
    10. Brito, Ricardo D. & Bystedt, Brianne, 2010. "Inflation targeting in emerging economies: Panel evidence," Journal of Development Economics, Elsevier, vol. 91(2), pages 198-210, March.
    11. Carl E. Walsh, 2009. "Inflation Targeting: What Have We Learned?," International Finance, Wiley Blackwell, vol. 12(2), pages 195-233, August.
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    Cited by:

    1. Jessica F. Green, 2021. "Beyond Carbon Pricing: Tax Reform is Climate Policy," Global Policy, London School of Economics and Political Science, vol. 12(3), pages 372-379, May.

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    More about this item

    Keywords

    Financial Institutions; Inflation targets; Transmission of monetary policy;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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