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SUMMARY:Did inflation targeting make a difference during the financial cri
 sis? - Jonathan Smith
DTSTART:20120508T160000Z
DTEND:20120508T170000Z
UID:TALK37904@talks.cam.ac.uk
CONTACT:Sheryl Anderson
DESCRIPTION:This paper seeks to explore whether inflation targeters (ITers
 ) fared better than non-ITers in the largest recession since the ‘Great 
 Depression’. Early evidence by Roger (2010) and Carvalho-Filho (2011) ha
 s been rather positive in this regard\; suggesting superior growth perform
 ance and lower market perceptions of risk. However\, these papers do not f
 ormally address the sample selection issue that has plagued the inflation 
 targeting (IT) literature. This paper therefore aims to contribute to the 
 literature by taking IT to be a treatment. We employ a two-pronged approac
 h to the analysis: borrowing from the program evaluation literature\, we e
 mploy propensity score matching combined with differences-in-differences. 
 Then to understand time-varying performance during the crisis\, we also em
 ploy a panel fixed effects model with country and time-fixed effects\, con
 trolling for possible time-varying heterogeneity via instrumental variable
 s (IV). We find that ITers did perform better in the crisis\, with smaller
  output contractions and smaller increases in 5-year Sovereign CDS spreads
 . However\, we only find weak evidence for superior consumption growth. Tu
 rning to possible drivers behind this performance\, we find that ITers cut
  nominal policy rates by more (and these translated into real cuts)\, were
  more successful in avoiding deflationary pressures\, experienced larger d
 epreciations in their real exchange rate\, and for emerging economies (EME
 s) had less need for fiscal stimulus. Therefore\, we interpret this superi
 or performance as a culmination of factors that stem from a superior abili
 ty to anchor inflation expectations.
LOCATION:Lucia Windsor Room\, Newnham College
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