Coping with the Recent Financial Crisis, did inflation Targeting Make any Difference?

Mercredi | 2012-01-18


Countries have faced one of the greatest economic shocks recently. The effects of the financial crisis went largely among the financial markets and hit the real economy. The aim of this study is to investigate whether inflation targeting helped countries which implement this monetary policy strategy to perform better during the 2008/2009 financial crisis. Based on the literature, we first present some arguments suggesting that inflation targeters can be expected to do better when facing a global shock. Our empirical investigation is conducted on a large sample of developed and developing countries. Difference in performances between targeters and non-targeters during the crisis are assessed in two ways: central banks performances – in terms of inflation and interest rate – and more general economic performances in terms of GDP growth. We apply difference in difference in the spirit of Ball and Sheridan (2005) and find that there is no significant difference between the two groups concerning inflation and GDP growth. However, the rise in interest rates during the crisis has been significantly less pronounced for targeters.