Does Inflation Targeting Outperform Alternative Policies During Global Downturns?

27 Pages Posted: 16 Oct 2014 Last revised: 17 Oct 2014

See all articles by Renee Fry-McKibbin

Renee Fry-McKibbin

Australian National University (ANU) - Crawford School of Public Policy; Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy

Chen Wang

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics, Students

Date Written: October 2014

Abstract

This article examines the performance of inflation targeters during the 2007-2012 downturn compared to those without this policy. Propensity score matching methods are used to compare the policy regimes, where during a downturn the more successful policy results in higher inflation and output growth, lower unemployment, and a better fiscal position. The analysis is conducted separately for developed and emerging countries. Inflation targeting tends to insulate developed countries, but is much less conclusive for the emerging countries during downturns. These results are opposite to those found for normal economic periods which are inconclusive for developed countries, but beneficial for emerging countries. Most concerning for emerging countries is that inflation targeters experience lower GDP growth in downturns. Both developed and emerging countries need to evaluate their choice of monetary regime by taking into account the tradeoff between low and stable inflation during normal periods with growth during downturns.

Keywords: Inflation, Inflation targeting, Financial crisis, Propensity score matching

JEL Classification: E31, E52, E58

Suggested Citation

Fry-McKibbin, Renee and Wang, Chen, Does Inflation Targeting Outperform Alternative Policies During Global Downturns? (October 2014). CAMA Working Paper No. 64/2014, Available at SSRN: https://ssrn.com/abstract=2510161 or http://dx.doi.org/10.2139/ssrn.2510161

Renee Fry-McKibbin (Contact Author)

Australian National University (ANU) - Crawford School of Public Policy ( email )

7 Liversidge Street
Lennox Crossing
Canberra, ACT 0200
Australia

Australian National University (ANU) - Centre for Applied Macroeconomic Analysis (CAMA), Crawford School of Public Policy ( email )

Canberra, Australian Capital Territory 0200
Australia

Chen Wang

Australian National University (ANU), Research school of Finance, Actuarial Studies and Applied Statistics, Students ( email )

Kingsley Street
Acton
Australia

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
100
Abstract Views
614
Rank
479,249
PlumX Metrics