How Do Middle-Income Countries Fare Under an Inflation Targeting Regime

Inflation-targeting regime, as a framework for monetary policy conduct, has been adopted by central banks in thirty countries. Some of these countries enjoy high incomes while others have middle incomes. In contrast to the development-based classification – often applied in the literature, thus ignoring income disparity – this study employs income-based classification. The objective is to investigate, using a panel of middle-income countries, whether inflation targeting is a good remedy for high inflation. In addition to the commonly used covariates in the literature, this study also includes in its covariate matrix the worldwide governance indicators as proxy for institutional quality. The findings exhibit a significant reduction of inflation among the inflation-targeting adopters compared to the non-adopting middle-income countries. The results are robust to the exclusion of high inflation episodes, and to using the alternative measures of inflation. The results are also robust to the post-estimation tests recommended for such empirical analysis.