Research

With more than three decades since its first adoption, Inflation targeting (IT) has emerged as the popular monetary policy regime that has been increasingly adopted by advanced as well as emerging economies. This paper examines the impact of adopting inflation targeting on the inflation rate using a staggered difference-in-difference approach. The estimation methodology is relevant to the multiple time periods and variation in treatment timing setup as shown by the IT regime. The long panel data set has 38 treated countries and 116 control countries, divided into two sample periods; 1980-2021 and 1985-2021. Due to the presence of hyperinflation in certain countries, these samples are further restricted based on certain threshold analyses, and the findings suggest that IT reduces inflation for treated countries by 2.59% and 2.37%. The impact becomes particularly evident when differentiating between advanced economies and Emerging Market Economies (EMEs). In the case of EMEs, inflation targeting policy leads to a significant reduction in inflation, amounting to about 4.24%.

Central bank independence (CBI) pertains to the autonomy of monetary policymakers from direct governmental or political interference in policy implementation. Over the past decades, many countries have conferred increased independence upon their monetary authorities, particularly in the aftermath of the 2008 financial crisis. The paper investigates the role of central bank independence (CBI) in the context of implementing IT. A closer look at the composition of central banks' decision-making bodies is necessary given the growing adoption of IT as the preferred monetary policy and the growing prevalence of central bank independence. Thus, the study examines the impact of change in CBI on change in inflation over time using first-difference transformation of the variables using a fixed effects estimation approach and a comprehensive dataset formed using a number of criteria that are also in line with the IT regime. The results emphasize that a yearly change in independence over time is associated with lower inflation for countries by 5.67 pp. These results become stronger for IT countries, especially EMDEs.