The Choice of Adopting Inflation Targeting in Emerging Market Economies: Do Institutions Matter?

Mardi | 2010-02-23

Yannick LUCOTTE – Grégory LEVIEUGE

Over the last decade, a growing number of emerging market economies has adopted inflation targeting as monetary policy framework. In a recent paper, Freedman and Laxton (2009) ask the question “Why Inflation Targeting?”. This paper empirically investigates this question by analyzing a large set of institutional and political factors potentially associated with a country’s choice of IT in a sample of 50 emerging countries over the period of 1986-2005. Using a panel probit model, our results suggest that central bank independence, policy-makers’ incentives and characteristics of political system (such as the number of veto players in government, the political stability, or the degree of federalism) play an important role in the choice of IT regime, while financial market development not matters.