Testing the impact of inflation targeting on inflation

Abstract

Purpose

The purpose of this paper is to examine the impact of inflation targeting on inflation for 27 countries that have adopted an inflation‐targeting regime.

Design/methodology/approach

The paper uses intervention analysis in Harvey's structural time series model to analyse the impact of inflation targeting on inflation, using quarterly observations. This approach provides the most useful framework for separating changes that occur to a series ordinarily over time from those happening due to exogenous events identified a priori, such as inflation targeting.

Findings

The empirical evidence suggests that almost all of the central banks that have pursued this strategy have been unsuccessful at controlling inflation, with the results indicating that the adoption of an inflation‐targeting regime has had the perverse effect on inflation for almost every country.

Practical implications

The implication of the finding is that central banks which have adopted an inflation‐targeting regime do not appear to have been particularly successful in reducing inflation in any significant way, as is regularly claimed in the extant literature.

Originality/value

The paper provides further evidence against the adoption of an inflation‐targeting regime using an unconventional approach for 27 countries that are regarded as “fully‐fledged” inflation‐targeting countries.

Citation

Tawadros, G.B. (2009), "Testing the impact of inflation targeting on inflation", Journal of Economic Studies, Vol. 36 No. 4, pp. 326-342. https://doi.org/10.1108/01443580910973556