Impact of Inflation Targeting on Inflation Volatility

Abstract

In this study, we investigate the impact of the inflation targeting (IT) regime on inflation volatility by applying treatment effects to a panel of 186 countries for the 1980–2018 period. We apply the differences-in-differences estimation to evaluate the pre-and post-adoption impact of the IT policy on reducing inflation volatility. Our estimation results demonstrate that IT countries have significantly reduced inflation volatility compared with non-IT countries. However, several countries suffer from historic hyperinflation, which significantly impacts IT after its adoption. Central banks adopt a similar price stability-centric approach in monetary policy execution. The crucial elements needed for effective IT policy implementation include financial market maturity, effective monetary policy transmission, and the overall macroeconomic stability of countries.