Inflation targeting and the cyclicality of monetary policy

- Many countries have adopted inflation targeting (IT) regimes to build policy credibility.
- We use propensity score matching to analyse whether adopting IT has facilitated countercyclical monetary policies.
- IT has a statistically significant and quite large effect in facilitating countercyclical monetary policy.
- The result is robust to controlling for financial crises, high inflation, and sample composition.

We assess whether the adoption of inflation targeting (IT) frameworks has facilitated countercyclical monetary policies in a sample of 90 industrial and developing economies, 22 of which have adopted IT. Using propensity score matching methods, we show that the average treatment effect of IT has a statistically significant and quantitatively quite large effect in facilitating a more countercyclical monetary policy in IT adopting countries.