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Do Monetary, Fiscal and Financial Institutions Really Matter for Inflation Targeting in Emerging Market Economies?

Most emerging market economies (EMEs) which have implemented inflation targeting (IT) have continued to experience large, frequent and sometimes persistent inflation target misses. At the same time these countries had reformed their institutional structures when implementing IT. In this paper we empirically study the importance of central bank independence, fiscal discipline and financial sector development for the achievement of inflation targets in EMEs using the panel ordered logit model. We find that when we control for variables such as output gap, exchange rate gap and openness, the improvement in central bank independence, fiscal discipline and financial systems reduces the probability of inflation target misses. Importantly, some control variables lead to the missing of inflation target bands. These are, in order of importance; exchange rate gap, output gap, inflation target horizon and level of openness. The combined impact of institutional structures is quite large, indicating their signifi…cant contribution to the infl‡ation performance and credibility of IT.

Working Paper 247
1 September 2011
RELATED JOURNAL:

Research in International Business and Finance
1 January 2017
SHARE THIS Working Paper PUBLICATION:
25 September 2012
Publication Type: Working Paper
JEL Code: E52, G28

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