Inflation targeting and disinflation costs in Emerging Market economies

Abstract

In this paper, we study whether adopting inflation targeting in emerging market economies affects the output costs of disinflation, controlling for a number of additional factors. Based on a sample of 40 emerging market economies during 1990–2017, we provide evidence that adopting inflation targeting is not associated with lower sacrifice ratios in emerging market economies. Specifically, we show that, controlling for the macroeconomic and institutional environment in EMEs, the choice of monetary regimes does not matter for disinflation costs. We also find that, when starting from low to moderate initial inflation, the speed of disinflation (shock therapy versus gradual disinflation) does not matter in these economies. Moreover, we show that trade openness is associated with lower sacrifice ratios, while we obtain opposite results for central bank independence. However, the impact of these factors on sacrifice ratios is rather small. Our main findings are robust to alternative classifications of the inflation targeting regime, alternative definitions of disinflation episodes, different peak levels of trend inflation rate, and across various specifications of the empirical model.