Thursday, 17 March 2011: 18:00
It has been almost twenty years since Reserve Bank of New Zealand became the first central bank to adopt the monetary policy framework called inflation targeting (IT). Then, since the beginning of the 1990s IT has been adopted by several central banks. Despite its popularity, it is not without its critics who argue either that inflation targeting is not any more successful in controlling inflation than other alternative policy regimes. Through simulation techniques of a quasi-natural experiment, the real contribution due to IT for reducing the inflation and its volatility around the world in the last years is analyzed. The greater numbers of countries which use this strategy and the growing experience over time allow better conditions to achieve robust empirical analysis. In this paper is analyzed a sample based on 180 countries for a period from 1990 to 2006 is split into two sets of countries (advanced and developing countries). The findings denote that the adoption of IT is an appropriate strategy for driving the inflation to the acceptable international level. On the other hand, IT is not the best medicine for controlling inflation volatility. Moreover, the empirical results denote that the adoption of IT is useful for countries which need credibility for the conduction of the monetary policy as is the case of Brazil.
Keywords: inflation targeting, inflation, inflation volatility, propensity score matching, credibility.
JEL: E42, E52.