The lag in effect of inflation targeting and policy evaluation

Abstract

The lag in effect of monetary policy contains vital information for the policy evaluation. Allowing for a time-varying treatment effect, we show that Inflation Targeting (IT) effectively lowers inflation for both developed and developing countries. Developed countries reach their targets rapidly with a 2-year lag in effect. Developing countries, however, reduce inflation gradually towards their targets and do not reach their ultimate goal by the end year of 2007.

Notes

¹We exclude five countries that adopt IT after 2005 – Ghana, Indonesia, Romania, the Slovak Republic and Turkey, because a 2-year experience or less seems too short to tell meaningful treatment effects of IT for developing countries.