How did inflation targeting economies fare in this crisis?

Filho Carvalho and E. Irineu of IMF evaluate performance of Inflation targeting economies vs non-inflation targeting economies in this crisis. 


This paper appraises how countries with inflation targeting fared during the current crisis, with the goal of establishing the stylized facts that will guide and motivate future research.  

  • We find that since August 2008, IT countries lowered nominal policy rates by more and this loosening translated into an even larger differential in real interest rates relative to other countries;
  • were less likely to face deflation scares;
  • and saw sharp real depreciations not associated with a greater perception of risk by markets.
  • We also find some weak evidence that IT countries did better on unemployment rates and advanced IT countries have had relatively stronger industrial production performance.
  • Finally, we find that advanced IT countries had higher GDP growth rates than their non-IT peers, but find no such difference for emerging countries or the full sample.

Thumbs up for IT countries on most economic variables. 

The authors begin the paper by saying: 

The current economic crisis has driven the economics profession to rethink its views about macroeconomic policy in general and monetary policy in particular (e.g. Blanchard, Dell’Ariccia and Mauro, 2010). One of the most important questions facing researchers and policy makers in the post-crisis is whether the monetary policy regimes of the Great Moderation years should survive or be scrapped. 

The conclusion 

To sum-up the findings, IT has had a positive scorecard thus far. The monetary policy of IT countries appears to be more suited to dealing with the crisis. 

But you know it will be wrong to put the entire credit to IT framework. If we look at the sample countries: 

Our full sample excludes countries for which nominal GDP in dollars (variable ngdpd in the WEO) in 2002 was less than USD 10 billion; Zimbabwe because it is an outlier on several dimensions; Angola, Qatar, Sudan and United Arab Emirates because their inflation rates at the INS dataset are constant over several months, and the United States. This leaves us with a full sample of 84 countries. Notice that Iceland, perhaps the inflation targeter with the most troublesome crisis, and also the only one that has suspended IT during the crisis, is cut off the sample because it does not meet the criteria on nominal GDP. 

So you do not have US in the sample which is a non- IT country. Inclusion of US might lead to worse unemployment numbers for non-IT sample but better for others – GDP, inflation, large rate cuts as crisis happened.  

Another thing is to see the countries which have IT and are in the sample – Australia, Sweden, New Zealand, Canada, Norway, Chile etc. All have pretty good other economic institutions as well and IT alone cannot be credited. Like Chile’s finance ministry has received kudos, so is the case with Canada which has been credited with good financial regulations. Australia also managed to grow and was the only advanced economy that did not contract in any of the quarters. So, it was an all-round show.  

An IT could partly tell the story but other economic institutions are also part of the story. IT central banks alone cannot influence so many economic variables. Excluding US also biases the results a bit. Main learning – it is very important to look at the sample before accepting the results.

2 Responses to “How did inflation targeting economies fare in this crisis?”

  1. himaginary Says:

    Thank you for introducing an interesting paper.

    BTW, I think the author is one person: Filho Carvalho is the last name, and E. Irineu is the first name. IMF seems to use comma to separate last and first name, and semicolon to separate authors.

  2. Stark on pre-crisis reference model « Mostly Economics Says:

    […] This paper pointed, IT countries fared batter than non-IT countries. But it is not because of IT countries alone. […]

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