The choice of inflation targeting regimes for inclusive growth: Lessons from southern countries

• Published date: 01 February 2021
• Author: Reza Moosavi Mohseni,Behrooz Gharleghi
• Date: 01 February 2021
• DOI: http://doi.org/10.1002/pa.2152

ACADEMIC PAPER

The choice of inflation targeting regimes for inclusive growth:

Lessons from southern countries

Reza Moosavi Mohseni

1

|Behrooz Gharleghi

2

1

Department of Mathematical Sciences,

School of Engineering and Mathematical

Sciences, Auckland University of Technology,

Auckland, New Zealand

2

Dialogue of Civilizations Research Institute,

Berlin, Germany

Correspondence

Reza Moosavi Mohseni, Department of

Mathematical Sciences, School of Engineering

and Mathematical Sciences, Auckland

University of Technology, Auckland, New

Zealand.

Email: reza.moosavi.mohseni@aut.ac.nz

This study tries to shed light on whether the inflation targeting framework behaves

as a growth enhancing strategy in some selected southern countries. The study also

investigates the best choice of inflation targeting regimes. Using panel data regres-

sion model for a growth regression, we found that this monetary policy framework

has a relatively significant positive effect on economic growth. This means that even

in terms of economic growth, using inflation as a nominal anchor is a better frame-

work to conduct monetary policy than using exchange rate or money aggregate. The

results also revealed that among different types of inflation targeting frameworks,

full-fledged can be the best choice for the selected southern countries.

1|INTRODUCTION

The strategy that a central bank adopts to conduct monetary policy

highly affects the health of an economy. A tight monetary policy can

lead to recession in which produces a high level of unemployment. On

the other side, inflation and unstable price levels can be the result of

expansionary monetary policy. Theoretically, the conduct of monetary

policy depends on the target-instrument relationship. Tinber-

gen (1952) showed that there is an essential relationship be-tween

the number of instruments and the number of targets. However, there

is an agreement among economists that the short-term interest rate is

the monetary policy instrument and stable price level should be

the monetary policy target (Goodhart, 1989; Walsh, 2017;

Woodford, 2011).

Since New Zealand adopted the inflation targeting (IT) in 1990,

an increasing number of the central banks have employed this frame-

work to conduct their monetary policy. This adoption can be the most

important improvement that happened in monetary framework since

1990s. This monetary approach aims primarily to achieve the price

stability with a single-digit inflation. Even though some economists

criticized this monetary regime (Carrasco & Ferreiro, 2011; Ball &

Sheridan, 2005; Stiglitz, 2008; Frankel, 2009; Arestis, 2009; Brito &

Bystedt, 2010), the empirical articles revealed that this policy frame-

work can lead to a better monetary policy which is more transparent

and accountable (Bernanke & Mishkin, 1997) and will improve the

overall economic performance (Mishkin, 1999; Roger & Stone, 2005;

Mishkin, 2006; Walsh, 2009; Bernanke, Laubach, Mishkin, &

Posen, 2018). As King (2004) points out, the inflation targeting strat-

egy reduces the cost of making the right decisions. More importantly,

in contrast to other monetary regimes, no country left this framework

(Rose, 2007; Mihov & Rose, 2008).

Even though several articles on the choice of monetary regimes

have been carried out (Mihov & Rose, 2008; Mishkin, 1999, 2000;

Leitemo & Røisland, 2002; Stone, 2003; Adam, 2008; Rose, 2014),

there are a very limited number of studies on the choice of inflation

targeting regimes. Carare and Stone (2003, 2006) employed some

gauges for clarity and credibility to separate the inflation targeting

countries into three regimes. This classification can help a country to

design a suitable monetary regime with the structure of that

economy.

The IMF's annual report (2017) on exchange arrangements and

exchange restrictions shows that among 69 countries which have tar-

gets for inflation, the inflation targeting framework is being used by

40 developed and developing countries. These countries generally

choose to adopt a sort of flexible exchange rate to limit their vulnera-

bility to exchange rate shocks and to maintain an independent mone-

tary policy (Carare & Stone, 2006).

This study, which analyzes the choice of inflation targeting in

some southern countries, is related to a number of earlier empirical

articles carried out to show the impact of inflation targeting on eco-

nomic performance. However, the main objective of this study is

whether the inflation targeting has been able to boost economic

growth. If so, what is the best choice of the inflation targeting

regimes? To shed light on this objective, we examine the experiences

Received: 20 February 2020Revised: 18 March 2020Accepted: 2 April 2020

DOI: 10.1002/pa.2152

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https://doi.org/10.1002/pa.2152