Does inflation targeting matter for international trade? A synthetic control analysis

The literature highlights that inflation targeting (IT) economies enjoy a sizeable share of global trade, suggesting IT is a comparative advantage exclusive to such countries. Using a set of developed and developing countries—coupled with synthetic control methods—we estimate the causal effect of IT on the volume of international trade. We compare the post-IT path of each treated country to its synthetic counterpart. We find that IT adoption had sizeable positive (negative) long-run effects on Mexico’s (Brazil’s) trade and short-run effects, as large as 11 percentage points, on Uganda’s trade. For treated countries in Asia, Thailand recorded increases in trade, whereas the Korea Republic experienced nonlinear IT-induced trade effects. Norway registered negative IT effects, and Sweden, Canada, New Zealand and the UK experienced nonlinear effects in the post-IT period. IT induced negative and positive import and export volume and price changes in additional targeters. These heterogeneous IT-induced changes suggest that IT is not a source of comparative advantage in trade for all targeters and all post-adoption years.