Inflation Targeting and World Monetary Shocks: Evidence from Developing Economies
International Journal of Business and Economics Research
Volume 9, Issue 3, June 2020, Pages: 140-150
Received: Apr. 16, 2020; Accepted: May 3, 2020; Published: May 27, 2020
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Noura Abu Asab, Department of Economics, School of Business, University of Jordan, Amman, Jordan
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The paper assesses the co-movement of local and foreign interest rate for developing countries with a full-fledged inflation targeting framework during and after the 2008 financial crisis. A panel linear optimizing monetary model is estimated by the fixed effects with spatial correlation standard errors over quarterly span from Q12007 to Q2 2019. The results suggest that inflation targeters are highly vulnerable to external monetary shocks, even after years of notable efforts to de-dollarization and complete shift towards a full-fledged inflation targeting. From a regime evaluation prospective, the inflation targeters’ response to world monetary shocks is compared to that of a group of fixed exchange rate rule economies and managed exchange rate countries with other monetary regimes. The findings provide evidence that inflation targeting countries are not different in their interest rate response to world monetary shocks compared to non-inflation targeting countries’, and instead of having more flexibility, inflation targeters show stronger reaction to world monetary shocks. These results are found robust when generated out from different subsamples and under assumptions of strict and flexible inflation targeting and policy inertia. The findings indicate that adopting inflation targeting as a framework for monetary policy does not by itself support the overall macroperformance and independence of monetary policy or force continuing commitment to the inflation targeting conditions.
Inflation Targeting, Monetary Shocks, External Vulnerability, Interest Rate, Panel Data
To cite this article
Noura Abu Asab, Inflation Targeting and World Monetary Shocks: Evidence from Developing Economies, International Journal of Business and Economics Research. Vol. 9, No. 3, 2020, pp. 140-150. doi: 10.11648/j.ijber.20200903.17
Copyright © 2020 Authors retain the copyright of this article.
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