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Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios

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  • CARLOS EDUARDO S. GONÇALVES
  • ALEXANDRE CARVALHO

Abstract

Using data from OECD economies, we show that inflation targeters suffered smaller output losses during disinflations when compared to nontargeters. We also study why some countries choose to inflation target while others do not and find that higher average inflation and smaller debt levels render the adoption of the regime more likely. Applying Heckman's procedure to control for selection bias does not alter the link between inflation targeting and less costly disinflations.

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  • Carlos Eduardo S. Gonçalves & Alexandre Carvalho, 2009. "Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 233-243, February.
    • Handle: RePEc:wly:jmoncb:v:41:y:2009:i:1:p:233-243
    DOI: 10.1111/j.1538-4616.2008.00195.x
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    References listed on IDEAS

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    5. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
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    7. von Hagen, Jurgen, 1999. "Money growth targeting by the Bundesbank," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 681-701, June.
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    1. Chevaughn van der Westhuizen & Renee van Eyden & Goodness C. Aye, 2022. "Is Inflation Uncertainty a Self-Fulfilling Prophecy? The Inflation-Inflation Uncertainty Nexus and Inflation Targeting in South Africa," Working Papers 202254, University of Pretoria, Department of Economics.
    2. Carsten Hefeker & Michael Neugart, 2024. "Policy rules and political polarization," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 26(4), August.
    3. Shu Lin & Haichun Ye, 2012. "What to Target? Inflation or Exchange Rate," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1202-1221, April.
    4. Marc Hofstetter & Franz Hamann & Miguel Urrutia, 2014. "Inflation Targeting in Colombia, 2002–12," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Fall 2014), pages 1-37, June.
    5. Petrevski, Goran, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," EconStor Preprints 271122, ZBW - Leibniz Information Centre for Economics.
    6. Balima, Hippolyte W. & Kilama, Eric G. & Tapsoba, René, 2020. "Inflation targeting: Genuine effects or publication selection bias?," European Economic Review, Elsevier, vol. 128(C).
    7. Stojanovikj, Martin & Petrevski, Goran, 2024. "The choice of monetary regimes in emerging market economies: Inflation targeting versus its alternatives," International Review of Economics & Finance, Elsevier, vol. 93(PA), pages 237-260.
    8. Martin Stojanovikj & Goran Petrevski, 2024. "Inflation targeting and disinflation costs in Emerging Market economies," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 51(1), pages 283-312, February.
    9. Atsuyoshi Morozumi & Michael Bleaney & Zakari Mumuni, 2020. "Inflation targeting in low‐income countries: Does IT work?," Review of Development Economics, Wiley Blackwell, vol. 24(4), pages 1529-1550, November.
    10. Magkonis, Georgios & Zekente, Kalliopi-Maria, 2020. "Inflation-output trade-off: Old measures, new determinants?," Journal of Macroeconomics, Elsevier, vol. 65(C).
    11. Hwang, Inwook & Zhu, Xiaoyang, 2024. "State-dependent oil price shocks on inflation and the efficacy of inflation targeting regime," Journal of International Money and Finance, Elsevier, vol. 144(C).
    12. Chris Loewald & Konstantin Makrelov & Ekaterina Pirozhkova, 2022. "TheshorttermcostsofreducingtrendinflationinSouthAfrica," Working Papers 11029, South African Reserve Bank.

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