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© 2022 International Monetary Fund
WP/22/227
IMF Working Paper
European Department
Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance
Prepared by Zhongxia Zhang and Shiyi Wang
Authorized for distribution by Rachel van Elkan
November 2022
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encour age debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: Inflation Targeting (IT) has become a prevalent monetary policy framework in the past three decades, as more central banks adopted and maintained price stability as their primary monetary policy mandate. Using a dataset of 68 major advanced countries and emerging markets economies , this paper evaluates the effects of inflation targeting countries’ track records on their macroeconomic performance, measured by real GDP growth and CPI inflation. This paper constructs three novel inflation targeting track record measures and establishes new stylized facts on the heterogeneity of inflation targeting countries’ tendency in managing inflation with respect to their stated objectives. This paper finds evidence that most targeters conduct dynamic inflation targeting by frequently updating inflation target bands, and their band sizes are wide-ranging across IT countries. We empirically study the contemporaneous and future effects of inflation targeting track records on countries’ macro economic performance. Results from the dynamic pane l and local projection regressions suggest that better IT track records do not lead to superior growth and inflation rates in the short term.
| JEL Classification Numbers: | E31, E52, E58, O47. |
| Keywords: | inflation targeting, track records, dynamic target points and ranges, economic growth and inflation. |
| Author’s E-Mail Address: | zzhang2@imf.org |
| JEL Classification Numbers: | E31, E52, E58, O47. |
| Keywords: | inflation targeting, track records, dynamic target points and ranges, economic growth and inflation. |
| Author’s E-Mail Address: | zzhang2@imf.org |
Title Page
Do Actions Speak Louder Than Words? Assessing the Effects of Inflation Targeting Track Records on Macroeconomic Performance*
Zhongxia Zhangâ€
International Monetary Fund
Shiyi Wang‡
Southwestern University of Finance and Economics
September 2022
Abstract
Inflation Targeting (IT) has become a prevalent monetary policy framework in the past three decades, as more central banks adopted and maintained price stability as their primary monetary policy mandate. Using a dataset of 68 major advanced countries and emerging markets economies, this paper evaluates the effects of inflation targeting countries’ track records on their macroeconomic performance, measured by real GDP growth and CPI inflation. This paper constructs three novel inflation targeting track record measures and establishes new stylized facts on the heterogeneity of inflation targeting countries’ tendency in managing inflation with respect to their stated objectives. This paper finds evidence that most targeters conduct dynamic inflation targeting by frequently updating inflation target bands, and their band sizes are wide-ranging across IT countries. We empirically study the contemporaneous and future effects of inflation targeting track records on countries’ macroeconomic performance. Results from the dynamic panel and local projection regressions suggest that better IT track records do not lead to superior growth and inflation rates in the short term.
JEL Classification Codes: E31, E52, E58, O47.
Keywords: Inflation Targeting, Track Records, Dynamic Target Points and Ranges, Economic Growth and Inflation.
Contents
1 Introduction
2 Literature Review
3 Data and Stylized Facts
3.1 Data Description
3.2 Stylized Facts
3.3 Inflation Targeting Track Record Measures
3.4 Dynamic Inflation Target Bands
4 Empirical Results
4.1 Results for All Countries
4.2 Results for Inflation Targeting Countries
5 Robustness Checks
6 Conclusion
We thank Rachel van Elkan, Aart Kraay, Prakash Loungani, Tamim Bayoumi, Hou Wang, Dun Jia, Olga Bespalova, Tong Xu, and seminar participants at the Southwestern University of Finance and Economics for their valuable comments. The views expressed in this paper are those of the authors. All errors are our own.
European Department, International Monetary Fund, Washington DC, the United States. Email: zzhang2@imf.org
Institute of Chinese Financial Studies, Southwestern University of Finance and Economics, Chengdu, China. Email: wangshiyi@swufe.edu.cn