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Does Inflation Targeting Matter for Output Growth? Evidence from Industrial and Emerging Economies

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  • Varella Mollick, Andre

    ()
    (University of Texas - Pan American)

  • Torres, Rene Cabral

    ()
    (Escuela de Graduados en Administracion Publica y Politica Publica)

  • Carneiro, Francisco G.

    ()
    (The World Bank)

Abstract

This paper examines the effects of inflation targeting on industrial and emerging economies' output growth over the "globalization years" of 1986-2004. Controlling for trade openness and two indicators of financial globalization, the authors find systematic positive and significant effects of inflation targeting on real output growth. In dynamic models, the findings show strong output persistence in industrial economies, in which partial and full inflation targeting regimes have a positive long-run impact on growth. In emerging markets, only full inflation targeting policies have any output effect in the long-run. The results suggest that strict inflation targeting is needed to make the discipline effect of the disinflation process outweigh the output costs of promoting high interest rates to attract capital flows in a global world. These findings are robust to the treatment of endogenous globalization measures.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4791.

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Length: 33 pages
Date of creation: 01 Dec 2008
Date of revision:
Handle: RePEc:wbk:wbrwps:4791

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Keywords: Economic Growth; Globalization; Inflation Targeting; Panel Data Methods;

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Cited by:
  1. Ftiti, Zied, 2010. "The macroeconomic performance of the inflation targeting policy: An approach based on the evolutionary co-spectral analysis (extension for the case of a multivariate process)," Economic Modelling, Elsevier, vol. 27(1), pages 468-476, January.
  2. Gustavo José De Guimarães E Souza & Helder Ferreira De Mendonça & Joaquim Pinto De Andrade, 2014. "Output Growth And Inflation Targeting: Empirical Effects Across The World," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 057, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  4. Rangan Gupta, 2006. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Working Papers 200610, University of Pretoria, Department of Economics.
  5. Zied Ftiti & Walid Hichri, 2014. "The Price Stability Under Inflation Targeting Regime : An Analysis With a New Intermediate Approach," Working Papers 2014-099, Department of Research, Ipag Business School.

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