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Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation

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  • Lucotte, Yannick
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    Abstract

    Inflation targeting is a monetary policy framework which was adopted by several emerging countries over the last decade. Previous empirical studies suggest that inflation targeting has significant effects on either inflation or inflation variability in emerging targeting countries. But, by reinforcing the disinflation process and so, by reducing drastically seigniorage revenue, the adoption of this monetary policy framework could also affect the design of fiscal policy. In a recent paper, Minea and Villieu (2009a) show theoretically that inflation targeting provides an incentive for governments to improve institutional quality in order to enhance tax revenue performance. In this paper, we test this theoretical prediction by investigating whether the adoption of inflation targeting affects the fiscal effort in emerging markets economies. Using propensity score matching methodology, we evaluate the “treatment effect” of inflation targeting on fiscal mobilization in thirteen emerging countries that have adopted this monetary policy framework by the end of 2004. Our results show that, on average, inflation targeting has a significant positive effect on public revenue collection.

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    Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 23871.

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    Date of creation: 13 Jul 2010
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    Handle: RePEc:pra:mprapa:23871

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    Keywords: Inflation targetingk; Public revenue; Treatment effect; Propensity score matching; Emerging countries.;

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    1. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, American Economic Association, vol. 82(3), pages 537-55, June.
    2. Vega, Marco & Winkelried, Diego, 2004. "Inflation Targeting and Inflation Behavior: A Successful Story?," MPRA Paper 838, University Library of Munich, Germany.
    3. Dreher, Axel & Sturm, Jan-Egbert & de Haan, Jakob, 2008. "Does high inflation cause central bankers to lose their job? Evidence based on a new data set," European Journal of Political Economy, Elsevier, Elsevier, vol. 24(4), pages 778-787, December.
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    7. Yannick Lucotte, 2009. "Central Bank Independence and Budget Deficits in Developing Countries: New Evidence from Panel Data Analysis," Post-Print, HAL halshs-00447398, HAL.
    8. Gerlach, Stefan, 1999. "Who targets inflation explicitly?," European Economic Review, Elsevier, Elsevier, vol. 43(7), pages 1257-1277, June.
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    27. repec:nbr:nberwo:12876 is not listed on IDEAS
    28. Donato Masciandaro & Guido Tabellini, 1987. "Monetary regimes and fiscal deficits: a comparative analysis," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 125-152.
    29. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series, Central Bank of Brazil, Research Department 76, Central Bank of Brazil, Research Department.
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