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Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation

  • Yannick Lucotte

    ()

    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

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    Inflation targeting is a monetary policy framework which was adopted by several emerging countries over the last decade. Previous empirical studies suggest that inflation targeting has significant effects on either inflation or inflation variability in emerging targeting countries. But, by reinforcing the disinflation process and so, by reducing drastically seigniorage revenue, the adoption of this monetary policy framework could also affect the design of fiscal policy. In a recent paper, Minea and Villieu (2009a) show theoretically that inflation targeting provides an incentive for governments to improve institutional quality in order to enhance tax revenue performance. In this paper, we test this theoretical prediction by investigating whether the adoption of inflation targeting affects the fiscal effort in emerging markets economies. Using propensity score matching methodology, we evaluate the “treatment effect” of inflation targeting on fiscal mobilization in thirteen emerging countries that have adopted this monetary policy framework by the end of 2004. Our results show that, on average, inflation targeting has a significant positive effect on public revenue collection.

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    Paper provided by HAL in its series Post-Print with number halshs-00505140.

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    Date of creation: 13 Jul 2010
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    Handle: RePEc:hal:journl:halshs-00505140
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    1. Marc Zelmer & Andrea Schaechter & Mark R. Stone & Alina Carare, 2002. "Establishing Initial Conditions in Support of Inflation Targeting," IMF Working Papers 02/102, International Monetary Fund.
    2. Huang, Haizhou & Wei, Shang-Jin, 2005. "Monetary Policies for Developing Countries: The Role of Institutional Quality," CEPR Discussion Papers 4911, C.E.P.R. Discussion Papers.
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    4. Marco Caliendo & Sabine Kopeinig, 2008. "Some Practical Guidance For The Implementation Of Propensity Score Matching," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 31-72, 02.
    5. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    6. Minea, Alexandru & Villieu, Patrick, 2009. "Threshold effects in monetary and fiscal policies in a growth model: Assessing the importance of the financial system," Journal of Macroeconomics, Elsevier, vol. 31(2), pages 304-319, June.
    7. Donato Masciandaro & Guido Tabellini, 1987. "Monetary regimes and fiscal deficits: a comparative analysis," Proceedings, Federal Reserve Bank of San Francisco, pages 125-152.
    8. Adrián Armas & Francisco Grippa, 2005. "Targeting Inflation in a Dollarized Economy: The Peruvian Experience," Research Department Publications 4423, Inter-American Development Bank, Research Department.
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    14. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Wiley Blackwell, vol. 65(2), pages 261-94, April.
    15. Axel Dreher & Jakob de Haan & Jan-Egbert Sturm, 2007. "Does High Inflation Cause Central Bankers to Lose their Job? Evidence Based on a New Data Set," CESifo Working Paper Series 2045, CESifo Group Munich.
    16. Hélène Ehrhart & Alexandru Minea & P. Villieu, 2011. "Deficit, Seigniorage and the Growth Laffer Curve in developing countries," Working Papers halshs-00554257, HAL.
    17. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    18. Joyce, Joseph P. & Nabar, Malhar, 2009. "Sudden stops, banking crises and investment collapses in emerging markets," Journal of Development Economics, Elsevier, vol. 90(2), pages 314-322, November.
    19. Hélène Ehrhart, 2011. "Assessing the relationship between democracy and domestic taxes in developing countries," Working Papers halshs-00553607, HAL.
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    21. Lin, Shu & Ye, Haichun, 2009. "Does inflation targeting make a difference in developing countries?," Journal of Development Economics, Elsevier, vol. 89(1), pages 118-123, May.
    22. Gerlach, Stefan, 1999. "Who targets inflation explicitly?," European Economic Review, Elsevier, vol. 43(7), pages 1257-1277, June.
    23. Yannick Lucotte, 2009. "Central Bank Independence and Budget Deficits in Developing Countries: New Evidence from Panel Data Analysis," Post-Print halshs-00447398, HAL.
    24. E. EHRHART & Alexandru MINEA & Patrick VILLIEU, 2009. "Deficits, Seignorage and the Growth Laffer Curve in Developing Countries," Working Papers 118, Orleans Economic Laboratorys, University of Orleans.
    25. Francesca Castellani & Xavier Debrun, 2001. "Central Bank Independence and the Design of Fiscal Institutions," IMF Working Papers 01/205, International Monetary Fund.
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