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Monetary Policy and Financial Stability: The Role of Inflation Targeting

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  • Dinabandhu Sethi
  • Debashis Acharya

Abstract

This article examines the relationship between Inflation targeting (IT) and financial instability from 1990 to 2015 for Asian economies. To measure financial instability, a multidimensional financial conditioning index is calculated following the ECB's approach. Using a fixed effects panel data model the study finds that adoption of IT policy in Asian economies has an adverse impact on financial stability, thus rejecting the ‘conventional wisdom’ hypothesis. Further, the Vector Autoregression (VAR) result shows that an IT regime increases housing returns and encourages investors to take higher risks.

Suggested Citation

  • Dinabandhu Sethi & Debashis Acharya, 2020. "Monetary Policy and Financial Stability: The Role of Inflation Targeting," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 53(1), pages 50-75, March.
    • Handle: RePEc:bla:ausecr:v:53:y:2020:i:1:p:50-75
    DOI: 10.1111/1467-8462.12348
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    Cited by:

    1. Mishra, Akanksha & Dubey, Amlendu, 2022. "Inflation targeting and its spillover effects on financial stability in emerging market economies," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1198-1218.
    2. A. Ajisafe, Rufus & D. Odejide, Adekunle & M. Ajide, Folorunsho, 2021. "Monetary Policy And Financial Stability In Nigeria," Ilorin Journal of Economic Policy, Department of Economics, University of Ilorin, vol. 8(2), pages 17-35, June.

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