Macroeconomic effects of formal adoption of inflation targeting

Abstract

We examine the impact of formal adoption of inflation targeting (IT) on inflation, growth and anchoring of inflation expectations in advanced economies and emerging markets and developing economies. We find that while the early adopters of IT (pre‐2000) saw declines in inflation rates following adoption, IT adopters since then have enjoyed such success in only about half the cases. Our country‐level analysis—using the synthetic control method—shows that IT adoption delivers significant inflation gains in about a third of the cases. We find limited support for the concern that adoption of IT systematically leads to poorer growth outcomes.