Level, structure, and volatility of financial development and inflation targeting

This article, by synthesizing the inflation targeting (IT)-inflation and inflation-finance linkages, assesses whether the adoption of IT exerts any significant impacts on financial development (in terms of level, structure, and volatility). By using data on 74 countries over the 1980-2010 period, the empirical results indicate that adopting IT is associated with higher development of banks, stock markets, insurance sectors, and bond markets in the developing but not in the industrial economies. In addition, we show that the implementation of IT leads to a more market-oriented financial system in both developed and developing countries, and a more stable process of financial development in the developing subsample. Finally, our evidence also reveals that countries with a lower, instead of a higher, probability of adopting IT are exactly those who benefit most from implementing such a monetary framework.