Evaluating the Performance of Inflation Targeting

Abstract

Applying the ordinary least squares method (OLS) and panel data analysis, the performance of inflation targeting (IT) regime is analyzed in 11 developed and developing countries. We compare the economic performance (i) between pre-IT and post-IT periods and (ii) between developing economies and developed economies that have implemented IT. The performance of IT is evaluated based on (i) inflation persistency; (ii) output growth; (iii) exchange rate volatility; (iv) deviation of inflation and (v) output gap. Besides, the disinflation cost/trade-off relationship between output gap and deviation in inflation is tested. The implementation of IT has effectively reduced the inflation rate and stimulated high output growth. The reduction of inflation rate is larger in developing economies but the gain in higher growth is larger in developed economies. On the other hand, there is strong evidence that IT has led to higher volatility in exchange rate of developing countries. Furthermore, the deviations of inflation and output gap have increased in the post-IT period in few economies. However, results failed to prove that IT has led to the trade-off relationship between inflation and output gap as the trade-off relationship between inflation and output gap is also detected in the pre-IT period. Overall results provide evidences on better economies condition under IT regime.