Inflation Targeting and Private Domestic Investment in Developing Countries

This paper analyzes the effect of inflation targeting on private domestic investment in developing countries. Using propensity scores matching methods, thus mitigating tra- ditional self-selection problems, we find that inflation targeting has led to a 2.05 -2.53 percentage point increase in domestic investment in targeting countries compared to non- targeting ones. Estimates are economically meaningful and robust to various checks, notably sample changes, additional controls, alternative estimation methods, and falsifi- cation tests. A few heterogeneity features of the treatment effect are further highlighted, depending on some factors. Finally, we explore the main transmission channels and iden- tify monetary policy credibility as the key driver of the regime’s effectiveness.