The effectiveness of inflation targeting since 1990: a cross-country comparative analysis
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Date
2024
Authors
Amankwah, Kwame
University of Lethbridge. Faculty of Arts and Science
Journal Title
Journal ISSN
Volume Title
Publisher
Lethbridge, Alta. : University of Lethbridge, Dept. of Economics
Abstract
This thesis examined how Inflation Target (IT) countries have performed in terms of managing inflation and inflation volatility. The thesis also conducted a comparative analysis of inflation between inflation targets and non-inflation targets countries. A sample of 48 IT and non-IT countries and annual observations from the period 1990 to 2022 were employed. For the empirical analysis, the probit model was used to estimate the probability of inflation falling within the target band. The results suggest the lower and upper limit of the inflation rate in IT is crucial in maintaining inflation within its target band combined with a policy interest rate. The probit regression model also suggests that Sub-Saharan African countries that use Inflation Targeting on average are more likely to fall outside their inflation target band relative to the omitted zone of Oceania though not significant. Europe, Asia, and North and Central American regions were not significantly different from the Oceania zone. South American countries have a higher probability relative to Oceania of approximately 0.13 and this is the only statistically significant regional result.
The empirical evidence from the volatility regression model suggests that implementing IT in countries lowers inflation volatility compared to those without IT adoption. The dummy coefficient of the IT target suggests that volatility, measured by the standard deviation of the historical inflation rate, is 28% lower for countries that use IT and is statistically significant.
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Keywords
Inflation , Inflation targets , Non-inflation targets , Comparative analysis