Inflation Targeting Regimes in Emerging Market Economies: To Invest or Not to Invest?

Abstract

We propose a stochastic learning rule through an Agent-based Model (ABM) to understand how emerging market economies (EMEs) can achieve high levels of investment, given the announced inflation target rate. The central banks act as a pseudo-player, choosing between the pursued target inflation rate or a negative inflation rate. By taking this action as given, bounded-rational firms and workers iteratively play a two-population well-mixed evolutionary game to make investment decisions. Our findings show that when inflation converges to its target, less the central planners' effort to reach the steady-state with investment coordination. When central banks target a negative inflation rate, it can speed up the EMEs' convergence to a steady-state with agents coordinating their investment strategies. It shed some light on central banks' transparency and credibility to avoid the so-called debt-deflation spiral, which typically increases the uncertainty in EMEs, limiting the investments in the economy.