Does the Global Financial Crisis Matter for the Macro Economic Performance of Inflation Targeting in Advanced and Developing Countries?: A Panel Study

Year 2016, Volume: 16 Issue: 3, 35 - 50, 19.10.2016

Assoc. Prof. Dr. Metin Özdemir , Asst. Prof. Dr. Selim Tüzüntürk

https://doi.org/10.18037/ausbd.390332

Abstract

 Inflation targeting has come under sharp attack in the aftermath of the global financial crisis. In this paper we compare the macroeconomic performances of advanced and developing inflation targeting countries before and after the global financial crisis. Using a panel data methodology, we assess the effectiveness of the inflation targeting framework in both country groups when confronting a serious shock. Our results demonstrate that developing inflation targeting countries seem to have performed better in handling the global financial crisis and to have outperformed their advanced peers in the aftermath of the crisis. We argue that the performance of developing inflation targeting countries has arisen from an inflation targeting framework and countercyclical fiscal policy. The global financial crisis also reveals that price stability is not enough to secure financial stability and growth. The main issue for the future of inflation targeting is to incorporate financial stability. 

Keywords

Inflation Targeting, Global Financial Crisis, Macroeconomic Performance

References

• Angeriz, A., Arestis, P. (2008). Assessing Inflation Targeting through Intervention Analysis. Oxford Economic Papers, 60, 293-317.
• Arestis, P. (2012). A Historical, Theoretical and Empirical Perspective on Inflation Targeting in Hagen M. Kramer, Heinz D. Kurz & Hans-Michael Trautwein, (Eds). Macroeconomics and the History of Economic Thought Festschrift in Honour of Harald Hagemann, 196-208. New York: Routledge.
• Arestis, P., Caporale, G. M., Cippolini, A. (2002). Does Inflation Targeting Affect the Trade Off Between Output Gap and Inflation Variability. The Manchester School, 70, 528–545.
• Arestis, P., Sawyer, M. (2010). What Monetary Policy After the Crisis?. Review of Political Economy, 22, 499–515.
• Arestis, P., Sawyer, M. (2013). Moving from Inflation Targeting and Incomes Policy. Panoeconomicus, 60, 1-17.
• Ball, L. (2010). The Performance of Alternative Monetary Regimes. National Bureau of Economic Research Working Paper, 16124.
• Ball, L., Sheridan, N. (2005). Does Inflation Targeting Matter?. in Ben S. Bernanke & Michael Woodford, (Eds). The Inflation-Targeting Debate, 249-282. Chicago: University of Chicago Press. Bank for International Settlements. (2010). 80th Annual Report.
• Bank of Japan. (2012). The Price Stability Goal in the Medium to Long Term. February 14, 2012, Retriewed 29.01.2015, from http://www.boj.or.jp/en/announcements/ release_2012/k120214b.pdf.
• Batini, N., Laxton, D. (2007). Under What Conditions Can Inflation Targeting be Adopted? The Experience of Emerging Markets. in Frederic S. Mishkin, Klaus Schmidt-Hebbel & Norman Loayza, (Eds). Monetary Policy Under Inflation Targeting, p. 467- 506. Central Banking, Analysis and Economic Policies Book Series. Santiago: Banco Central de Chile.
• Bernanke, B. S., Laubach,T., Mishkin, F. S. & Posen, A.S. (1999). Inflation Targeting: Lessons from International Experience. Princeton: Princeton University Press.
• Bernanke, B.S. (2004). The Great Moderation. Remarks at the meetings of the Eastern Economic Association, Washington, February 20, 2004.
• Bernanke, B.S. (2003). A Perspective on Inflation Targeting. Remarks at the Annual Washington Policy Conference of the National Association of Business Economists, Washington, March 25, 2003.
• Blanchard, O. (2009). The State of Macro. Annual Review of Economics, 1, 209–228.
• Blanchard, O., Del’Ariccia, G., Mauro, P. (2010). Rethinking Macroeconomic Policy. Journal of Money, Credit and Banking Supplement, 42, 199-215.
• Blanchard, O. J., Mitali D., Faruqee, H. (2010). The Initial Impact of the Crisis on Emerging Market Countries. Brookings Papers on Economic Activity, 41, 263-307.
• Borio, C. (2011). Central Banking Post-Crisis: What Compass for Uncharted Waters?. Bank for International Settlements Working Papers, 353.
• Borio, C., White, W. (2004). Whither Monetary and Financial Stability? The Implications of Evolving Policy Regimes. Bank for International Settlements Working Papers, 147.
• Borio, C., Disyatat, P. (2009). Unconventional Monetary Policies: An Appraisal. Bank for International Settlements Working Papers, 292.
• Broto, C. (2011). Inflation targeting in Latin America: Empirical Analysis Using GARCH Models. Economic Modelling, 28, 1424-1434.
• Buiter, W. (2009). The Unfortunate Uselessness of Most State of the Art Academic Monetary Economics. March 3, 2009. Retriewed 29.01.2015, from http://blogs.ft.com/maverecon/2009/03/the-unfortunate-uselessness-of-most-state-of-the-art-academic-monetary-economics/.
• Bullard, J. B. (2012). Inflation Targeting in the USA. Speech at the Union League Club of Chicago. Chicago, February 6, 2012.
• Cameron, A. C. & Trivedi, P. K. (2006). Microeconometrics Methods and Applications. Cambridge: Cambridge University Press.
• Carney, M. (2012). Guidance. Remarks at the CFA Society, Toronto. December 11, 2012. Retriewed 29.01.2015, from http://www.bankofcanada.ca/2012/12/speeches/guidance/.
• Cecchetti, S. G., Ehrmann, M. (2002). Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers’ Preferences and Outcomes in Norman Loayza & Klaus Schmidt-Hebbel, (Eds). Monetary Policy: Rules and Transmission Mechanisms, 247-274. Central Banking, Analysis and Economic Policies Book Series. Santiago: Banco Central de Chile.
• Claessens, S., Dell’Ariccia, G., Igan, D., Laeven, L. (2010). Cross-Country Experiences and Policy Implications from the Global Financial Crisis. Economic Policy, 25, 267-293.
• Clarida, R., Gali, J., Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37, 1661–1707.
• Coulibaly, B. (2012). Monetary Policy in Emerging Market Economies: What Lessons from the Global Financial Crisis. Board of Governors of the Federal Reserve System International Finance Discussion Papers, 1042.
• Decressin, J., Laxton, D. (2009). Gauging Risks for Deflation, International Monetary Fund Staff Position Note, 09/01.
• Didier, T., Constantino, H., Schmukler, S.L. (2012). How Resilient and Countercyclical were Emerging Economies During the Global Financial Crisis?. Journal of International Money and Finance, 31, 2052-2077.
• Dueker, M. J., Fischer, A. M. (2006). Do Inflation Targeters Outperform Non-Targeters. Federal Reserve Bank of St. Louis Review, 84, 431-450.
• El-Arian, M.A. (2010). Navigating the New Normal in Industrial Countries. The Per Jacobsson Lecture, Washington.
• Erlat, H. (1997). Panel Data: A Selective Survey. Yapi Kredi Research Department Discussion Series, No. 97–04.
• Federal Open Market Committee. (2012) Press Release. January 25, 2012. Retriewed 29.01.2015, from http://www.federalreserve.gov/newsevents/press/ monetary/20120125c.htm.
• Filho, I. C. (2011). 28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession. The B. E. Journal of Macroeconomics, 11, 1-44.
• Fouejieu, A. A, Roger, S. (2013). Inflation Targeting and Country Risk: an Empirical Investigation. International Monetary Fund Working Paper, 13/21.
• Fraga, A., Goldfajn, I, Minella, A. (2003). Inflation Targeting in Emerging Market Economies. National Bureau of Economic Research Working Paper, 10019.
• Frankel, J., Vegh, C., Vulletin, G. (2011). On Graduation from Fiscal Procyclicality. National Bureau of Economic Research Working Paper, 17691.
• Frankel, J. (2012). Inflation Targeting Is Dead: Long Live Nominal GDP Targeting. June 19, 2012. Retriewed 29.01.2015, from http://www.voxeu.org/article/ inflation-targeting-dead-long-live-nominalgdp- targeting.
• Frappa, S., Mésonnier, J. S. (2010). The Housing Price Boom of the Late 1990s: Did Inflation Targeting Matter. Journal of Financial Stability, 6, 243-254.
• Freedman, C., Laxton, D. (2009). Why Inflation Targeting?. International Monetary Fund Working Paper, 09/86.
• Friedman, B. F. (2004). Monetary Policy for Emerging Market Economies: Beyond Inflation Targeting. Macroeconomics and Finance in Emerging Market Economies, 1, 1-12.
• Gerlach, S., Giovannini. A, Tille,C., Viñals, J. (2009). Are the Golden Years of Central Banking Over? The Crisis and the Challenges. London: Centre for Economic Policy Research.
• Goncalves, C. E. S., Salles, J. M. (2008). Inflation Targeting in Emerging Economies: What do the Data Say. Journal of Development Economics, 85, 312- 318.
• Goncalves, C. E. S., Carvalho, A. (2009). Inflation Targeting Matters: Evidence from OECD Economies’ Sacrifice Ratios. Journal of Money, Credit and Banking, 41, 233–243.
• Grauwe, P. (2007). There is more to Central Banking than Inflation Targeting. Nowember 14, 2007. Retriewed 29.01.2015, from http://www.voxeu.org/ article/subprime-crisis-time-inflation-targetingrethink.
• Gudmundsson, M. (2010). Challenges to Inflation Targeting: Raising Some Issues. Bank for International Settlements Papers, 51.
• Gujarati, D.N. (2003). Basic Econometrics. New York: McGraw-Hill.
• Gürkaynak, R. S., Levin, A. T., Marder, A. N., Swanson, A. T. (2007). Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere in Frederic S. Mishkin, Klaus Schmidt- Hebbel & Norman Loayza, (Eds). Monetary Policy Under Inflation Targeting, p. 415-465. Central Banking, Analysis and Economic Policies Book Series. Santiago: Banco Central de Chile.
• Habermeier, K., Ötker-Robe, I., Jacome, L., Giustiniani, A., Ishi, K., Vávra, D., Kışınbay, T., Vazquez,F. (2009). Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries- A Cross Regional Perspective. International Monetary Fund Working Paper, 09/1.
• Hildebrand, P. (2011). Introduction of a Minimum Swiss Franc Exchange Rate against the Euro. Short statement, 6 September, 2011. Retrieved 29.01.2015, from http://www.snb.ch/en/ mmr/speeches/id/ref_20110906_pmh/source/ ref_20110906_pmh.en.pdf.
• Hsiao, C. (2003). Analysis of Panel Data. Cambridge: Cambridge University Press.
• Hume, M., Sentence, A. (2009). The Global Credit Boom: Challenges for Macroeconomics and Policy. Journal of International Money and Finance, 28, 1426-1461.
• International Monetary Fund. (2005). World Economic Outlook Building Institutions, Washington: International Monetary Fund.
• International Monetary Fund. (2012). World Economic Outlook Coping with High Debt and Sluggish Growth, Washington: International Monetary Fund.
• Issing, O. (2012). The Mayekawa Lecture: Central Banks-Paradise Lost. Monetary and Economic Studies, 30, 55-74.
• Ito, T. (2010). Monetary Policy and Financial Stability: Is Inflation Targeting Passé?. Asian Development Bank Economics Working Paper Series, 206.
• Johnson, D. R. (2002). The Effect of Inflation Targeting on the Behaviour of Expected Inflation: Evidence From An 11 Country Panel. Journal of Monetary Economics, 49, 1493–1519.
• King, M. (2009). Speech at the Lord Mayor’s Banquet for Bankers and Merchants of the City of London at the Mansion House, London, June 17, 2009.
• Krause, S., Mendez, F. (2008). Institutions, Arrangements and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis. Journal of Macroeconomics, 30, 282–307.
• Lane, P. R., Milesi-Ferretti, G. M. (2010). The Cross-Country Incidence of the Global Crisis. International Monetary Fund Working Paper, 10/171.
• Lanzafame, M., Nogueira Jr, R. P. (2011). Credibility in Emerging Economies: Does Inflation Targeting Matter?. The Manchester School, 79, 1080–1098.
• Lee, W. S. (2011). Comparative Case Studies of the Effects of Inflation Targeting in Emerging Economies. Oxford Economic Papers, 63, 375-397.
• Leijonhufvud, A. (2008). Central Banking Doctrine in Light of the Crisis. May 14, 2008. Retrieved 29.01.2015, from http://economistsview.typepad.com/economistsview/2008/05/central-banking.html.
• Levin, A. T., Natalucci, F. M., Piger, J. M. (2004). The Macroeconomic Effects of Inflation Targeting. Federal Reserve Bank of St. Louis Review, 86, 51-80.
• Lin, S., Ye, H. (2007). Does Inflation Targeting Really Make a Difference? Evaluating the Treatment Effect of Inflation Targeting in Seven Industrial Countries. Journal of Monetary Economics, 54, 2521-2533.
• Lin, S., Ye, H. (2009). Does Inflation Targeting Make a Difference in Developing Countries?. Journal of Development Economics, 89, 118-123.
• Lin, S. (2010). On the International Effects of Inflation Targeting. The Review of Economics and Statistics, 92, 195-199.
• Louis, R. J., Balli, F. (2013). Low-Inflation-Targeting Monetary Policy and Differential Unemployment Rate: Is Monetary Policy to be Blamed for the Financial Crisis? Evidence from Major OECD Countries. Economic Modelling, 30, 546-564.
• Mátyás, L. & Sevestre, P. (1996). The Econometrics of Panel Data. Dordrecht, the Netherlands: Kluwer Academic Publisher.
• Mendonça, H. F. (2007). Empirical Evidence from Fourteen Countries with Explicit Inflation Targeting. Applied Economics Letters, 14, 573-576.
• Mendonça, H. F., Guimarães, G. J. S. (2012). Is Inflation Targeting a Good Remedy to Control Inflation?. Journal of Development Economics, 98, 178-191.
• Mishkin, F. S. (2011). Monetary Policy Strategy: Lessons from the Crisis. National Bureau of Economic Research Working Paper, 16755.
• Mishkin, F.S. & Schmidt-Hebbel,K. (2007). Does Inflation Targeting Make a Difference in Frederic S. Miskin, Klaus Schmidt-Hebbel & Norman Loayza, (Eds). Monetary Policy under Inflation Targeting, p. 291-372. Central Banking, Analysis and Economic Policies Book Series. Santiago: Banco Central de Chile.
• Neumann, M. J., Hagen, J. (2002). Does Inflation Targeting Matter. Federal Reserve Bank of St. Louis Review, 84, 127-148.
• O’Hara, P. A. (2011). International Subprime Crisis and Recession: Emerging Macroprudential, Monetary, Fiscal and Global Governance. Panoeconomicus, 58, 1-17.
• Ostry, J. D., Ghosh, A. R., Chamon, M., Qureshi, M. S. (2012). Tools for Managing Financial Stability Risks from Capital Inflows. Journal of International Economics, 88, 407-421.
• Posen, A.S. (2009). Inflation Targeting after the Bubble. Austrian National Bank’s 37th Economics Conference, Vienna.
• Primus, K., Reshma, M. (2011). An Empirical Analysis of the Inflation Targeting Framework in a Time of Financial and Economic Crisis. Business, Finance and Economics in Emerging Economies, 6, 136-159.
• Rasche, R. H., Williams,M. (2007). The Effectiveness of Monetary Policy. Federal Reserve Bank of St. Louis Review, 89, 447–489.
• Roger, S. (2010). Inflation Targeting at Twenty: Achievements and Challenges in David Cobham, Øyvind Eitrheim, Stefan Gerlach and Jan F. Qvigstad, (Eds). Twenty Years of Inflation Targeting Lessons Learned and Future Prospects, p. 25-56. New York: Cambridge University Press.
• Rose, A. K. (2007). A Stable International Monetary System Emerges: Inflation Targeting is Bretton Woods, Reversed. Journal of International Money and Finance, 26, 663-681.
• Rose, A. K., Spiegel,M. M. (2011). Cross-country Causes and Consequences of the 2008 Crisis: An Update. European Economic Review, 55, 309–324.
• Samaryna, H., Haan, J. (2011). Right on Target: Exploring the Determinants of Inflation Targeting Adoption, De Nederlandsche Bank Working Paper, 321.
• Siklos, P. L. (2010). Inflation Targeting: It’s Not Broke, It Doesn’t Need Fixing, But Can It Survive?. Journal of International Commerce, Economics and Policy, 1, 59–80.
• Spiegel, M. M. (2012). Monetary Regimes and Capital Account Volatility Before and After the Global Financial Crisis, in Victor Pontines and Reza Siregar, (Eds). Exchange Rate Appreciation, Capital Flows and Excess Liquidity: Adjustment and Effectiveness of Policy Responses, p. 115-173. Malaysia: The South East Asian Central Banks (SEACEN) Centre.
• Stiglitz, J.E. (2008). The Failure of Inflation Targeting. May 6, 2008. Retrieved 29.01.2015, from http:// www.project-syndicate.org/commentary/thefailure- of-inflation-targeting.
• Stiglitz, J. E. (2011). Rethinking Macroeconomics: What Failed, and How to Repair It. Journal of the European Economic Association, 9, 591–645.
• Stock, J.H. & Watson, M. W. (2003). Has the Business Cycle Changed: Evidence and Explanations. Federal Reserve Bank of Kansas City Jackson Hole Symposium. Kansas.
• Stock, J. H. & Watson, M. W. (2007). Introduction to Econometrics. Boston: Pearson Addison Wesley.
• Svensson, L.E.O. (2002). Monetary Policy and Real Stabilization. Federal Reserve Bank of Kansas City Jackson Hole Symposium, Kansas.
• Svensson, L.E.O. (2009). Flexible Inflation Targeting: Lessons from the Financial Crisis. Speech at the workshop “Towards a new framework for monetary policy? Lessons from the crisis” organized by De Nederlandsche Bank, Amsterdam, September 21, 2009.
• Svensson, L.E.O. (2010). Monetary Policy after the Financial Crisis. Speech at the IJCB Conference, Bank of Japan, September 17, 2010.
• Taylor, J. B. (2009). Economic Policy and the Financial Crisis: An Empirical Analysis of What Went Wrong. Critical Review, 21, 341-364.
• Truman, E. M. (2003). Inflation Targeting in the World Economy. Washington: Institute of International Economics.
• Vega, M., Winkelried, M. (2005). Inflation Targeting and Inflation Behaviour Successful Story?. International Journal of Central Banking, 1, 153–175.
• Vegh, C., Vuletin,G. (2011). Overcoming the Fear of Free Falling: Monetary Policy Graduation in Emerging Markets. National Bureau of Economic Research Working Paper, No. 18175.
• Wagner, H. (2010). The Causes of the Recent Financial Crisis and the Role of Central Banks in Avoiding the Next One. International Economics and Economic Policy, 7, 63-82.
• Walsh, C. E. (2009). Inflation Targeting: What Have We Learned?. International Finance, 12, 195–233.
• Walsh, C. E. (2011). The Future of Inflation Targeting. The Economic Record, 87, 23-36.
• Willard, L. B. (2011). Does Inflation Targeting Matter? A Reassessment. Applied Economics, 44, 2231-2244.
• Woodford, M. (2012). Inflation Targeting and Financial Stability. Sveriges Riksbank Economic Review, 1, 7-32.