Does inflation targeting weaken financial stability? Assessing the role of institutional quality

This paper analyzes how institutions' quality shapes the relationship between inflation targeting and financial stability in 63 countries over the period 1990–2014. We find that targeters with poor institutions are less financially stable than non-targeters only in Emerging and Developing Countries who use little or no macroprudential policies. As these policies are implemented, this effect works in reverse or becomes nil when institutions' quality improves. Thus, our paper calls for an explicit mandate for central banks in former countries to pursue both inflation and financial stability through macroprudential instruments' moderate use.