Does Inflation Targeting Really Promote Economic Growth?
Published Mar 30, 2021 · N. Khan
Review of Political Economy
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Abstract
ABSTRACT Inflation targeting, as a monetary-policy framework, is said to promote economic growth. Yet, when evaluating the macroeconomic performance of inflation-targeting regime, the existing literature only emphasizes the dynamics of inflation and the costs associated with taming inflation. There is hardly any assessment of the growth claim. To fill the gap and to measure the causal impact of inflation-targeting adoption on economic growth, we compare the dynamics of output growth and long-term unemployment between countries that have adopted inflation targeting and the non-adopting countries. Our findings seem to refute the growth claim, and paint a bleak picture of inflation targeting: when compared to the countries that did not adopt inflation targeting, there is a significant reduction in the average growth rate among the inflation-targeting adopters by over ½ percentage point. Additionally, long-term unemployment significantly rises among the inflation-targeting countries by over 1½ percentage points as compared to the non-adopters. These results are robust to both the exclusion of the outlier observations and to the sensitivity tests recommended for such analysis.