The choice of monetary regimes in emerging market economies: Inflation targeting versus its alternatives

This paper examines the macroeconomic, financial, and institutional factors that affect the adoption of inflation targeting vis-a-vis alternative monetary policy strategies for 44 emerging market economies during 1990–2017. We employ a multinomial logistic regression with inflation targeting and exchange rate pegs as treatment groups, and intermediary monetary strategies as the baseline group. The main findings from our study are as follows: higher average inflation is associated with lower probability of adopting inflation targeting; while both output growth and its volatility make the adoption of inflation targeting less likely. Concerning the effects of the control variables, financial sector development, central bank independence, greater exposure to capital flows, and the level of economic development are all associated with higher likelihood of adopting inflation targeting, whereas higher public debt, trade openness, and money growth have the opposite effect. Macroeconomic conditions seem to have different impact on the choice of inflation targeting and exchange rate pegs, whereas similar institutional conditions are conducive to the implementation of both regimes. Finally, the effects of macroeconomic and institutional conditions do not depend on the type of inflation targeting.