Short- and Long-Run Differences in the Treatment Effects of Inflation Targeting on Developed and Developing Countries

Recent studies that evaluate inflation targeting through average treatment effects generally conclude the window-dressing view for industrial countries and policy effectiveness for developing countries. Allowing for a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time, this paper provides new findings. First, developed countries lower inflation and reach their targets rapidly in two years and developing countries reduce inflation and move to their targets gradually in that disinflation still continues seven years after the policy adoption in our sample. Second, intertemporal tradeoffs occur for eight developed-country targeters. That is, targeting inflation significantly reduces inflation at the costs of higher inflation and growth variability and a lower output growth in the short-run, although no substantial effects in either the medium term or long-run. In contrast, no costs, only gains, emerge for thirteen developing-country targeters. Now, targeters achieve lower inflation following policy adoption as well as lower inflation and output growth variability in the short-run, medium term, and long-run. Output growth catches up in the medium term, although this effect is not significant in the long run. Interpretations of empirical findings and implications for monetary policy are discussed.