CFCM 18/08: Inflation targeting in low-income countries: Does IT work?

Abstract

Previous research on inflation targeting (IT) has focused on high-income countries (HICs) and emerging market economies (EMEs). Only recently has enough data accumulated for the performance of IT in low-income countries (LICs) to be assessed. We show that IT has not so far been effective in reducing in inflation in LICs, unlike in EMEs. Weak institutions, a typical feature in LICs, help explain this result, particularly under fl oating exchange rate regimes. Our interpretation is that poor institutions, leaving fiscal policy unconstrained, impair central banks' ability to conduct monetary policy in a way consistent with IT.

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A revised version has been published in Review of Development Economics, Vol. 24, no. 4 (November 2020), pp. 1528-1557.

Authors

Michael Bleaney, Atsuyoshi Morozumi and Zakari Mumuni

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