Do inflation targeting handcuffs restrain leviathan? Hard pegs vs. inflation targets for fiscal discipline in emerging markets

Abstract

Inflation targeting has been increasingly adopted in emerging markets as fixed exchange rates have fallen in popularity. An important question is whether inflation targeting provides the same level of fiscal discipline as a hard peg. Using the methodology of Fatas and Rose (2001), results here indicate that multilateral currency unions and currency boards lead to tighter fiscal policy than inflation targets.