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.