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Does Inflation Targeting Outperform Alternative Policies during Global Downturns?

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  • Renée A. Fry-McKibbin
  • Chen Wang

Abstract

This article examines the performance of inflation targeters during the 2007-2012 downturn compared to those without this policy. Propensity score matching methods are used to compare the policy regimes, where during a downturn the more successful policy results in higher inflation and output growth, lower unemployment, and a better fiscal position. The analysis is conducted separately for developed and emerging countries. Inflation targeting tends to insulate developed countries, but is much less conclusive for the emerging countries during downturns. These results are opposite to those found for normal economic periods which are inconclusive for developed countries, but beneficial for emerging countries. Most concerning for emerging countries is that inflation targeters experience lower GDP growth in downturns. Both developed and emerging countries need to evaluate their choice of monetary regime by taking into account the tradeoff between low and stable inflation during normal periods with growth during downturns.

Suggested Citation

  • Renée A. Fry-McKibbin & Chen Wang, 2014. "Does Inflation Targeting Outperform Alternative Policies during Global Downturns?," CAMA Working Papers 2014-64, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  • Handle: RePEc:een:camaaa:2014-64
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-10/64_2014_fry-mckibbin_wang_0.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Inflation targeting; Financial crisis; Propensity score matching;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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