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Inflation targeting and bank risk: The interacting effect of institutional quality

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  • Salma Louati
  • Younes Boujelbene

Abstract

This paper investigates whether institutional quality determines the effect of inflation targeting (IT) on the banking risk of Islamic versus conventional banks, using an unbalanced panel data over the period 2007–2016. However, the use of the generalized method of moments (GMM) and two measures of institutional quality, namely the Corruption Perception Index and the Government Effectiveness Index, show that the institutional quality failures strengthens the negative impact of IT on conventional banking risk. For the Islamic banking business model, results suggest that corruption impair the good functioning of the price stability channel of financial stability. While IT have different impact on Islamic and conventional banking stability, the operation of these two types of banks in the same corrupt environment reduces the positive effects expected from such a monetary policy.

Suggested Citation

  • Salma Louati & Younes Boujelbene, 2020. "Inflation targeting and bank risk: The interacting effect of institutional quality," Cogent Business & Management, Taylor & Francis Journals, vol. 7(1), pages 1847889-184, January.
    • Handle: RePEc:taf:oabmxx:v:7:y:2020:i:1:p:1847889
    DOI: 10.1080/23311975.2020.1847889
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