Does inflation targeting live up to all the hype?

Abstract

This study evaluates the impact of inflation targeting (IT) on inflation levels, volatility, and persistence in 59 emerging markets from 1985 to 2019, addressing the limitations of traditional methods that ignore staggered adoption. Using methodology that accounts for staggered implementation, IT is found to significantly reduce inflation, particularly when hyperinflationary economies are excluded. However, its effects on volatility and persistence are less conclusive. While traditional models suggest initial reductions in volatility, incorporating staggered adoption reveals no lasting impact. Similarly, IT does not significantly influence inflation persistence. The findings emphasize IT’s effectiveness in lowering inflation but limited influence on other aspects.