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Does Inflation Targeting Improve Fiscal Discipline? An Empirical Investigation

Author

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  • René TAPSOBA

    () (Centre d'Etudes et de Recherches sur le Développement International(CERDI))

Abstract

Based on panel data of 58 countries, of which 22 Inflation Targeters and 36 non Inflation Targeters, over the period 1980-2003, this paper highlights the effect of Inflation Targeting – IT- on Fiscal Discipline –FD-. We make four contributions to the literature. Firstly, by applying the 2SLS on the data, we estimate the effect of IT on central government FD as measured by Structural Primary Fiscal Balances. Secondly, we found that the effect of IT on FD takes place only on the Developing Countries sub-sample. Thirdly, the positive effect of IT on FD is stronger when the Central Bank –CB- adopts “Partial” IT rather than Full-Fledged IT –FFIT-. Fourthly, the positive effect of IT on FD is heterogeneous: it is conditional to the degree of CB independence, the level of financial deepening, the instability in the terms of trade and the length of exposure to IT -the effect is not immediate but cumulative over time-. Our results are robust to alternative specifications - using Propensity Score Matching Method, "System GMM" estimator, LAD estimator and applying 2SLS on annual data rather than triennial averages data- Our results could contribute importantly to the debate about the relevance of IT adoption by Developing Countries -due to their bad fiscal stances-.The results suggest that these countries could successfully adopt IT and improve their fiscal stances, provided that they adopt it gradually, establish flexible framework allowing them to react temporally to short-term external shocks and accompanies it with a greater independence of their CB and a deepening of their financial systems.

Suggested Citation

  • René TAPSOBA, 2010. "Does Inflation Targeting Improve Fiscal Discipline? An Empirical Investigation," Working Papers 201020, CERDI.
  • Handle: RePEc:cdi:wpaper:1181
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    References listed on IDEAS

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    Cited by:

    1. Richard C.K. Burdekin & King Banaian & Mark Hallerberg & Pierre L. Siklos, 2011. "Fiscal and monetary institutions and policies: onward and upward?," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 3(4), pages 340-354, November.
    2. repec:ukb:journl:y:2015:i:233:p:39-53 is not listed on IDEAS
    3. Sánchez, Elmer, 2013. "Grado de inversión y flujos de inversión directa extranjera a economías emergentes," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 61-79.
    4. Armand Fouejieu Azangue, 2012. "Coping with the Recent Financial Crisis, did Inflation Targeting Make Any Difference?," Working Papers halshs-00826277, HAL.

    More about this item

    Keywords

    Inflation Targeting; Fiscal Discipline; Central Bank; Monetary Policy; Fiscal Policy; Public Debt Monetization; Developing Countries.;

    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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