Inflation Targeting: Vaccine or Placebo?
Webinar Link
Meeting No: 2513 046 6024
password: inflation
Abstract
Over thirty countries around the world, including India) have formally adopted inflation targeting (IT). Those that have not yet adopted IT are urged by the international economic community to do so to build up their resistance to waves of inflation. This presentation provides a comprehensive comparison of the inflation and growth performance of countries that have formally adopted IT with countries that have not yet done so. We find little difference between the two groups of countries in mean inflation, volatility of inflation or anchoring of inflation expectations. We find that ‘regression to the mean’ can explain the apparent success of IT in lowering inflation: countries facing a bout of high inflation are more likely to adopt IT and then mistakenly credit the decline in inflation toward the mean to the adoption of IT. Moreover, using a synthetic control method where IT adopting countries are compared to a ‘peer’ group of countries reveals that IT is neither necessary nor sufficient for lowering inflation or boosting growth outcomes. Our results suggest that the hope that IT will be sufficient to keep the current upsurge in inflation in check is not consistent with the evidence.