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The impact of financial development on the effectiveness of inflation targeting in developing economies

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  • Ouyang, Alice Y.
  • Rajan, Ramkishen S.

Abstract

An ever-increasing number of developing economies with varied levels of financial development have adopted Inflation Targeting (IT) frameworks to guide monetary policy. Using a panel dataset of 54 developing economies over the period 1980 to 2015 (30 of which have IT frameworks), we re-visit the rather controversial issue of whether adoption of an IT framework leads to superior outcomes in terms of reducing inflation and its variability. After controlling for potential endogeneity and self-selection concerns of policy adoption, our main empirical finding is that IT frameworks appear to reduce inflation rates in developing economies regardless of the level of financial development, while it reduces variability of inflation rates only when we control for levels of financial market development. We further find that the effectiveness of IT framework on inflation is highly dependent on financial inclusion and bank characteristics, while the effect on inflation variability is more associated with components of capital market development.

Suggested Citation

  • Ouyang, Alice Y. & Rajan, Ramkishen S., 2019. "The impact of financial development on the effectiveness of inflation targeting in developing economies," Japan and the World Economy, Elsevier, vol. 50(C), pages 25-35.
    • Handle: RePEc:eee:japwor:v:50:y:2019:i:c:p:25-35
    DOI: 10.1016/j.japwor.2019.03.003
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    2. Oleg S. Sukharev, 2020. "Inflation control and adequacy of targeting to economic growth policy," Upravlenets, Ural State University of Economics, vol. 11(1), pages 33-44, March.
    3. Kaodui Li & Easmond Baah Nketia & Yusheng Kong & Michael Appiah, 2023. "An Introspective Analysis of Inclusive Growth in Africa, With an Eminence on the Influence of Governance and Financial Development Interaction," SAGE Open, , vol. 13(2), pages 21582440231, April.

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    More about this item

    Keywords

    Financial development; Financial markets; Financial inclusion; Inflation targeting; Inflation; Inflation variability;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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