Tuesday, December 14, 2010

28 months later!

28 Months Later: How Inflation Targeters Outperformed Their Peers in the Great Recession

Coming soon!

Twenty-eight months after the onset of the global financial crisis of August 2008, the evidence on post-crisis GDP growth emerging from a sample of 51 advanced and emerging countries is flattering for inflation targeting countries relative to their peers. The positive effect of IT is not explained away by other variables considered in the related literature, such as short-term external debt to GDP, the post-crisis growth performance of trading partners, changes in terms of trade, pre-crisis growth in private credit, and the pre-crisis current account balance. We find that inflation targeting countries lowered nominal and real interest rates more sharply than other countries; were less likely to face deflation scares; and had sharp real depreciations without a relative deterioration in their risk assessment by markets. While the task of establishing causal relationships from cross-sectional macroeconomics series is daunting, our reading of this evidence is consistent with the resilience of IT countries being related to their ability to loosen their monetary policy when most needed, thereby avoiding deflation scares and the zero lower bound on interest rates.

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