Do Preconditions of Inflation Targeting Framework Matter?

Abstract

The main feature of inflation targeting (IT) framework is the public announcement by the central bank that it will keep inflation at a numerical inflation target. A large literature addresses preconditions that a country should satisfy before adopting IT. However, there is much debate about whether satisfying these preconditions are essential. This study addresses this debate. Empirical results indicate that the fulfillment of preconditions before IT adoption ensures effective implementation of IT in the short-run. However, countries that met all preconditions before IT adoption do not have an advantage over countries that didn’t meet all preconditions before IT adoption in the long-run.