Journal of Development Economics 89 (2009) 118–123

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Journal of Development Economics

j o u r n a l h o m e p a g e : w w w. e l s e v i e r. c o m / l o c a t e / e c o n b a s e

Does inflation targeting make a difference in developing countries?

Shu Lin, Haichun Ye ⁎
Department of Economics, University of Colorado Denver, United States

A R T I C L E I N F O A B S T R A C T

Article history: We evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted
Received 4 October 2007 this policy by the end of 2004. Using a variety of propensity score matching methods, we show that, on
Received in revised form 13 March 2008 average, inflation targeting has large and significant effects on lowering both inflation and inflation
Accepted 28 April 2008
variability in these thirteen countries. However, the effectiveness of inflation targeting on lowering inflation
is found to be quite heterogeneous. The performance of a given inflation targeting regime can be affected by
JEL classification:
country characteristics such as government's fiscal position, central bank's desire to limit the movements of
E4
E5
exchange rate, its willingness to meet the preconditions of policy adoption, and the time length since the
policy adoption.
Keywords: © 2008 Elsevier B.V. All rights reserved.
Inflation targeting
Treatment effect
Propensity score matching
Developing countries

1. Introduction announcement of an inflation target makes a central bank's policy

Although inflation targeting has been widely adopted since the
early 1990s, the effectiveness of this policy framework on lowering
inflation and inflation variability still remains controversial among
researchers and policymakers. Numerous studies in the literature have
attempted to empirically evaluate the “treatment effect” of inflation
targeting in developed countries and have found mixed results.1 A
common drawback of these studies, as pointed out in a recent study by
Lin and Ye (2007), is that they all ignore the self-selection problem of
policy adoption, which can lead to biased estimates in these early
studies. Using a variety of propensity score matching methods, Lin and
Ye (2007) show that, once controlling for self-selectivity, inflation
targeting has no significant effects on either inflation or inflation
variability in developed targeting countries.
However, inflation targeting is not a policy just for developed
countries. To date, more than a dozen of developing countries have
also officially adopted inflation targeting. Thus, a complete evaluation
of the effectiveness of inflation targeting requires further evidence
from developing countries.
Can inflation targeting make a difference in developing countries?
The main argument in favor of inflation targeting is that an official
⁎ Corresponding author. Department of Economics, University of Colorado Denver,
Campus Box 181, Denver, CO 80217, United States. Tel.: +1 405 370 4052; fax: +1 303 556
3547.
E-mail address: haichunye@gmail.com (H. Ye).
1
These studies include Ammer and Freeman (1995), Mishkin and Posen (1997),
Groenveld (1998), Kuttner and Posen (1999), Johnson (2002), and Ball and Sheridan
(2005).
more credible, which helps to alleviate the dynamic inconsistency
problem, and thus should lead to lower (expectations of) inflation and
inflation variability.2 Given the fact that the initial credibility of central
banks in developing countries is significantly lower than that in
developed countries, it is reasonable to suspect that the credibility
gain from explicitly announcing an inflation target would be much
more substantial in developing countries. Therefore, despite its
limited effects in developed targeting countries, inflation targeting
may make a large difference in developing countries. Furthermore,
given the substantial idiosyncrasies in developing countries, the
efficacy of inflation targeting regimes might be quite heterogeneous
within these countries.
Nevertheless, formal empirical evidence on the treatment effect of
inflation targeting in developing countries is rare. To the best of the
authors' knowledge, Goncalves and Salles (2008) is the only existing
study that attempts to address this important issue. Using Ball and
Sheridan's (2005) cross-section regression methods, the authors show
that inflation targeting leads to lower inflation in a sample of 36
emerging countries. In this study, we employ a more comprehensive
panel dataset and a more appropriate methodology to evaluate the
treatment effect of inflation targeting on inflation and inflation
variability in thirteen developing countries that have adopted this
policy by the end of 2004. Our panel dataset consists of 52 developing
countries for the years 1985–2005. To control for the self-selection
problem of policy adoption, we make use of a variety of propensity
score matching methods proposed by Lin and Ye (2007). We find
strong and robust evidence supporting our speculation: the average
2
See Bernanke et al. (1999), Svensson (1997), and Mishkin (1999).

0304-3878/$ – see front matter © 2008 Elsevier B.V. All rights reserved.
doi:10.1016/j.jdeveco.2008.04.006
 S. Lin, H. Ye / Journal of Development Economics 89 (2009) 118–123 119

Table 1 Table 2
Inflation targeting developing countries and starting years Control group countries

Country Starting year Algeria Hong Kong, China Paraguay

Argentina Indonesia Romania
Default starting year Conservative starting year
Belarus Iran Russia
Brazil 1999 1999 Bulgaria Jamaica Singapore
Chile 1991 1999 Cape Verde Jordan Slovakia
Colombia 1999 1999 China Kazakhstan Slovenia
Czech Republic 1998 1998 Costa Rica Latvia Syria
Hungary 2001 2001 Croatia Lebanon Trinidad & Tobago
Israel 1992 1997 Dominican Republic Lithuania Tunisia
Korea 1998 1998 Egypt Macao, China Turkey
Mexico 1999 2001 Estonia Macedonia Ukraine
Peru 2002 2002 Georgia Mauritius Uruguay
Philippines 2002 2002 Guatemala Morocco Venezuela
Poland 1998 1998
South Africa 2000 2000
Thailand 2000 2000

Source: Rose (2007).

2.2. Propensity score matching methods

treatment effect of inflation targeting on inflation (variability) is found
to be quantitatively large and statistically significant. On average, the
adoption of inflation targeting has led to a reduction in the level of
inflation by nearly 3 percentage points in targeting countries. In
addition to estimating the average treatment effect, our study also
explores the heterogeneity feature of the treatment effect. We find
that the performance of a given inflation targeting regime can be
affected by country characteristics such as the time length since the
policy adoption, government's fiscal discipline, central bank's desire to
limit the movements of exchange rate, and its willingness to meet the
preconditions of policy adoption.
The rest of our study is organized as follows. Section 2 describes
our dataset and methodology. In Section 3, we estimate the average
treatment effect of inflation targeting on the treated employing a
variety of propensity score matching methods. We then explore the
heterogeneity feature of the treatment effect utilizing a control
function regression approach in Section 4. Section 5 offers our
conclusions.
2. Data and methodology
Our dataset consists of 52 developing countries examined for the
years 1985 to 2005. Most of the data are drawn from the World Bank's
World Development Indicator and the IMF's International Financial
Statistics.3
2.1. The treatment group and the control group
The treatment group includes thirteen developing countries that
have adopted inflation targeting by the end of 2004.4 We obtain their
starting years of targeting from Rose (2007), which provides a default
starting year and a conservative starting year for each targeting
country. Table 1 lists the thirteen targeting countries along with their
default and conservative starting years of inflation targeting.
To ensure that the treatment group and the control group are
reasonably comparable, our control group only includes non-targeting
developing countries that have a real GDP per capita at least as large as
that of the poorest targeting country and with a population size at
least as large as that of the smallest targeting country in our control
group. Table 2 lists the 39 non-targeting developing countries that
satisfy these criteria.
3 7
We have also drawn data from Ghosh et al. (2003) (for five-year central bank
governor turnover rate), Rose (2007) (for the starting dates of inflation targeting), and
Reinhart and Rogoff (2004) (for de facto exchange rate regimes).
4
Indonesia, Romania, Slovak Republic, and Turkey adopted inflation targeting after
2004, but we still treat them as non-targeting countries in this study.
An important econometric issue in evaluating the treatment effects
of inflation targeting is the non-random selection of policy adoption,
which arises when a country's targeting choice is systematically
correlated with a set of observable variables that also affect the
outcomes (inflation or inflation variability). Following Lin and Ye
(2007), we make use of a variety of propensity score matching
methods recently developed in the treatment effect literature to
address the self-selection problem. In particular, we consider two
nearest-neighbor matching estimators with n = 1 and n = 3, three
radius matching estimators with a wide radius (r = 0.04), a medium
radius (r = 0.02), and a tight radius (r = 0.01), a kernel matching
estimator, and a regression-adjusted local linear matching estimator.5
3. Estimating the average treatment effects
This section estimates the average treatment effects of inflation
targeting on the level of inflation (CPIG), defined as the annual growth
rate of CPI, and inflation variability (CPIGSTD), defined as the standard
deviation of a three-year moving average of inflation, in the thirteen
targeting countries.
3.1. Estimating the propensity scores
We first estimate the propensity scores using a probit model. The
dependent variable is the targeting dummy. We consider two groups
of control variables. The choice of the first group is based on the
literature that inflation targeting should be adopted only after some
preconditions are met.6 We choose the following three variables: the
lagged inflation rate (CPIG_1), broad money growth (BMG), and real
per capita GDP growth rate (GDPPCG). We expect the first two
variables to be negatively correlated with the probability of adopting
inflation targeting, and the last one to be positively correlated with the
probability.7 The second group of variables is used to control for the
likelihood of choosing exchange rate targeting as an alternative
framework for the conduct of monetary policy. We include a fixed
exchange rate regime dummy (FIX) and trade to GDP ratio (OPEN) as a
5
See Lin and Ye (2007) for detailed discussions of these propensity score matching
methods.
6
See, for example, Mishkin and Savastano (2001), Mishkin (2004), Svensson (2002),
and Truman (2003).
According to the literature (e.g., Truman, 2003; Masson et al, 1997; Minella et al,
2003), a country should adopt inflation targeting when its inflation is at reasonably
low level, preferably after a successful disinflation. Announcing a target rate far from
the realized can hurt the central bank's credibility. Therefore, we expect to obtain
negative sign on lagged inflation.
120 S. Lin, H. Ye / Journal of Development Economics 89 (2009) 118–123

Table 3
Probit estimates of propensity scores

Baseline model No hyperinflation episodes Using conservative starting years Post-1990 sample Adding DEBTGDP Adding CBTOR5
CPIG_1 −8.484⁎⁎⁎ −8.463⁎⁎⁎ −14.497⁎⁎⁎ −7.778⁎⁎⁎ − 3.519⁎⁎⁎ −3.815⁎⁎⁎
(1.492) (1.499) (2.057) (1.555) (1.151) (0.882)
OPEN −0.007⁎⁎⁎ −0.007⁎⁎⁎ −0.007⁎⁎⁎ −0.008⁎⁎⁎ − 0.005⁎⁎⁎ −0.003
(0.001) (0.001) (0.002) (0.002) (0.002) (0.002)
BMG −1.763⁎ −1.704⁎ −1.926⁎ −1.859⁎ − 2.989⁎⁎⁎ −0.481
(1.003) (1.007) (1.148) (1.057) (0.850) (0.540)
FIX −1.635⁎⁎⁎ −1.634⁎⁎⁎ −2.020⁎⁎⁎ −1.727⁎⁎⁎ − 1.582⁎⁎⁎ −0.844⁎⁎⁎
(0.169) (0.168) (0.195) (0.176) (0.220) (0.239)
GDPPCG 2.616 2.460 −0.241 2.205 4.856⁎⁎ 2.483
(1.772) (1.830) (1.840) (1.949) (2.448) (1.975)
DEBTGDP 0.0006
(0.003)
CBTOR5 −0.516
(0.494)
No. of observations 831 723 831 508 421 495
Pseudo R2 0.35 0.31 0.44 0.28 0.30 0.15

Notes: Constant terms are included but not reported. Robust standard errors are reported in parentheses. ⁎, ⁎⁎, and ⁎⁎⁎ indicate the significance level of 10%, 5%, and 1%, respectively.

measure of openness to trade in this group.8 Since exchange rate
targeting is more attractive to countries that have already adopted this
policy and to countries that are more open to trade, we expect to see
negative coefficients on these variables.
The results are reported in the first column of Table 3. All estimated
coefficients have the expected signs. We find that the lagged inflation
rate, broad money growth, openness, and exchange rate regime
systematically affect a country's targeting decision. The estimated
coefficients on these variables are all negative and significant,
indicating that countries with higher previous inflation, higher
money growth, higher level of openness to trade, or fixed exchange
rate regimes are less likely to adopt inflation targeting. Real GDP per
capita growth is insignificant. The overall fit of the regression is
reasonable with pseudo R2 around 0.35.
3.2. Results from matching
Before applying the matching methods, we want to make sure that
our treated and control units share the same support so that they are
comparable. We sort all the observations by their estimated
propensity scores and then discard all the control units whose
estimated propensity scores are lower than the lowest score among
the treated units.
The matching results based on the new sample are presented in
the first rows of Tables 4 and 5.9 Table 4 reports the estimated average
treatment effect on the treated (ATTs) on the level of inflation, and
Table 5 reports the estimated ATTs on inflation variability. The first
two columns of each table show the results from one-to-one-nearest-
neighbor and three-nearest-neighbor matching. The next three
columns report the results from radius matching, with radii ranging
from 0.01 to 0.04. Local linear regression matching and kernel
matching results are shown in the last two columns of each table.
The results are strong and robust. The estimated ATTs in the first
rows of Tables 4 and 5 are all found to be negative and statistically
significant. The average estimated ATT across different matching
methods is large in magnitude, around −2.97% in terms of annual
inflation rate. The evidence suggests that, on average, inflation
targeting has quantitatively large and statistically significant impacts
8
Our primary data source for de facto exchange rate regimes is Reinhart and Rogoff
(2004), which is available till 2001. We use the classifications reported by the IMF,
which has switched from reporting de jure classifications to reporting de facto
classifications since 1999, after 2001. A fixed regime is defined as either a hard peg or a
soft peg.
9
Matching estimates are obtained by using Stata command PSMATCH2 developed
by Leuven and Sianesi (2003).
on lowering both inflation and inflation variability in developing
targeting countries.
3.3. Robustness checks
This subsection checks the robustness of our empirical results.
Since twenty-six countries (including both targeting and non-
targeting) in our dataset have experienced hyperinflation (defined
as an annual inflation rate of 40% or higher), one may suspect that our
results might be driven by those extreme values of inflation. Our first
robustness check, therefore, is to drop those hyperinflation episodes.
The new probit estimates of the propensity scores are shown in the
second column of Table 3.The results are very similar to those reported
in the first column. CPIG_1, BMG, OPEN, and FIX are all negative and
significant while GDPPCG is still insignificant. The pseudo R2 of the
new regression is about 0.31. The new matching results are reported in
the second rows of Tables 4 and 5. Excluding hyperinflation episodes
does not change our results. The estimated ATTs on inflation and
inflation variability are all negative and significant. The average
estimated ATT on inflation across different matching methods is
about-2.64% in terms of the annual inflation rate.
Our second robustness check is to examine if our results are
sensitive to different starting time of inflation targeting using Rose's
(2007) conservative starting years. The probit estimates of propensity
score are shown in the third column of Table 3, and the matching
results are presented in the third rows of Tables 4 and 5. We obtain
very similar results: negative and significant ATTs on inflation and
inflation variability with an average ATT on inflation of −2.70%.
Third, to check whether our results are robust to different sample
periods, we also apply the propensity score matching analysis to the
post-1990 sample. Column 4 of Table 3 reports the results from the
probit regression, and the fourth rows of Tables 4 and 5 present the
results from matching. Dropping the pre-1990 observations does not
change our results either. The estimated ATTs are all negative and
statistically significant.
Last, we want to check whether our results are sensitive to
alternative specifications of the probit model. In the last two columns
of Table 3, we add government debt to GDP ratio (DEBTGDP) and a
five-year central bank governor turnover rate (CBTOR5) as an inverse
proxy of central bank independence to the probit regressions,
respectively. Adding these variables, however, comes at a large cost.
Due to limited data availability, the sample sizes in the last two
columns are reduced almost by half. The problem is more severe in the
last regression. Since the five-year central bank governor turnover rate
is available only till 1999, we now only have 25 targeting observations
 S. Lin, H. Ye / Journal of Development Economics 89 (2009) 118–123 121

Table 4
Matching estimates of treatment effect on the level of inflation

Matching Methods

Nearest-neighbor Three- Radius matching Local Kernel

matching nearest- linear regression matching
neighbor matching
matching
r = 0.04 r = 0.02 r = 0.01
Baseline model −0.030⁎⁎ −0.032⁎⁎⁎⁎ −0.028⁎⁎⁎ −0.031⁎⁎⁎ −0.033⁎⁎⁎ −0.026⁎⁎⁎ − 0.028⁎⁎⁎
(0.012) (0.010) (0.007) (0.008) (0.009) (0.008) (0.007)
No hyperinflation episodes −0.024⁎⁎ −0.027⁎⁎⁎ −0.027⁎⁎⁎ −0.029⁎⁎⁎ −0.030⁎⁎⁎ −0.022⁎⁎⁎ − 0.026⁎⁎⁎
(0.011) (0.010) (0.007) (0.007) (0.009) (0.008) (0.007)
Using conservative starting years −0.022⁎ −0.027⁎⁎ −0.024⁎⁎ −0.032⁎⁎⁎ −0.036⁎⁎⁎ −0.025⁎⁎ − 0.023⁎⁎
(0.013) (0.012) (0.010) (0.010) (0.012) (0.010) (0.010)
Post-1990 sample −0.027⁎⁎ −0.024⁎⁎ −0.020⁎⁎ −0.023⁎⁎ −0.022⁎⁎ −0.018⁎⁎ − 0.021⁎⁎
(0.014) (0.012) (0.009) (0.009) (0.011) (0.009) (0.009)
Adding DEBTGDP −0.016 −0.021⁎⁎ −0.022⁎⁎ −0.022⁎⁎ −0.029⁎⁎ −0.019⁎⁎ − 0.022⁎⁎⁎
(0.015) (0.011) (0.008) (0.010) (0.012) (0.009) (0.008)
Adding CBTOR5 −0.032 −0.023 −0.037⁎⁎⁎ −0.034⁎⁎⁎ −0.035⁎⁎⁎ −0.036⁎⁎ − 0.038⁎⁎⁎
(0.030) (0.019) (0.011) (0.011) (0.013) (0.014) (0.010)

Notes: A 0.06 fixed bandwidth and an Epanechnikov kernel are used for kernel and local linear regression matching. Bootstrapped standard errors are reported in parentheses. They
are based on 500 replications of the data. ⁎, ⁎⁎, and ⁎⁎⁎ indicate the significance level of 10%, 5%, and 1%, respectively.

(which have dependent variables equal to one). It turns out that
neither of these two variables is significant in the probit regressions.
Moreover, the overall fit of the last probit regression is substantially
worse compared to other probit specifications: the pseudo R2 falls to
0.15 when the central bank governor turnover rate is included.
Nevertheless, our matching results are quite robust to these
alternative specifications. According to the last two rows of Tables 4
and 5, most of the estimated ATTs on inflation and inflation variability
remain negative and statistically significant.
All in all, the results tell a very consistent story: on average, the
adoption of inflation targeting has significant effects on lowering both
inflation and inflation variability in these thirteen developing
targeting countries.
4. Exploring the heterogeneity in treatment effects
Unlike developed countries, developing countries usually exhibit
substantial heterogeneity in economic and institutional development.
Quite a few studies in the literature (e.g., Carare and Stone, 2006;
Fraga et al., 2003; Fry et al., 2000; Masson et al., 1997; Minella et al.,
2003; Mishkin, 1996; Mishkin, 2004; Mishkin and Savastano, 2001;
Svensson, 2002) argue that the performance of an inflation targeting
regime can be affected by these idiosyncrasies. Therefore, in addition
to evaluating the average treatment effects, it is also important to
explore the heterogeneity feature of the effectiveness of adopting
inflation targeting in developing countries.10
In this section, we explore four possible sources of heterogeneity
employing a control function regression approach. Our first investigation
is to test whether inflation targeting performs better in countries that have
higher estimated propensity scores (countries that better meet the
preconditions of policy adoption). Second, we examine whether, due to
the lagged effects of monetary policy, the time since the adoption of an
inflation targeting regime affects the outcome.11 We then test if
government fiscal position plays a role in the functioning of an inflation
targeting regime. Last, we also examine whether putting too much focus
on limiting exchange rate movements makes inflation targeting less
effective in lowering inflation (variability).12
Table 6 reports the estimated treatment effect on level of inflation
based on the control function regression approach. In the first column,
we simply run an OLS regression of inflation on a targeting dummy
within the common support. The estimated coefficient, which catches
the difference in mean inflation between targeting and non-targeting
countries, is negative and statistically significant. We then include the
estimated propensity score obtained from our baseline probit model
as a control function in the second column. The estimated coefficient
on the propensity score is statistically significant at the 1% level, which
is strong evidence for the presence of self-selectivity. The coefficient
on the targeting dummy is still statistically significant but is much
smaller in magnitude. The estimated average treatment effect after
controlling for self-selection is about 2.6 percentage points in terms of
annual inflation rate, which is close to the average treatment effect
obtained from matching.
The heterogeneity feature of the treatment effect is explored in the
next four columns of Table 6. In the third column, in addition to the
propensity score, we also include an interaction term of the targeting
dummy and the difference between the estimated propensity score
and its sample average. This specification allows for varying treatment
effect.13 The coefficient on the targeting dummy gives an estimate of
the treatment effect at the mean of the propensity score, and a
significant interaction term is evidence of heterogeneity. The results
show that treatment effect at the mean of the propensity is significant
and is about −1.8% in terms of annual inflation rate. More interestingly,
the estimated coefficient on the interaction term is found to be −0.054
and significant at the 5% level, implying that inflation targeting is
more effective in countries that have higher estimated propensity
scores (better meet the preconditions of policy adoption). Other
things equal, inflation targeting leads to an additional reduction in
inflation by 0.54 percentage point for every 10 percentage point
increase in the propensity score.
The fourth column tests the role of the time length since the policy
adoption by introducing an interaction term of the targeting dummy
and the time length since the policy adoption.14 We find that the
interaction term is negative and significant at the 1% level, which
confirms our suspicion that the performance of an inflation targeting
regime is deeply affected by the time length since the policy adoption.

10
The authors would like to thank an anonymous referee for this suggestion.
11
See Masson et al. (1997), Minella et al. (2003), and Fraga et al. (2003).
12
See Mishkin (2004) and Mishkin and Savastano (2001) for detailed discussions on
how government fiscal position affects the functioning of inflation targeting and the
problems with too strong a focus on limiting exchange rate movements under an
inflation targeting regime.
13
See Wooldridge (2002) for detailed discussions of this specification.
14
As a general rule, both interacted variables should be included in the regression
individually. We do not include time in the regression because the interaction term is
the same as the time variable.
122 S. Lin, H. Ye / Journal of Development Economics 89 (2009) 118–123

Table 5
Matching estimates of treatment effect on inflation variability

Matching methods

Nearest- Three- Radius matching Local Kernel

neighbor nearest- linear matching
matching neighbor regression
matching matching
r = 0.04 r = 0.02 r = 0.01
Baseline model −0.020⁎⁎ −0.027⁎⁎⁎ − 0.024⁎⁎⁎ −0.027⁎⁎⁎ −0.021⁎⁎⁎ −0.023⁎⁎⁎ − 0.024⁎⁎⁎
(0.010) (0.008) (0.007) (0.007) (0.007) (0.007) (0.006)
No hyperinflation episodes −0.021⁎⁎ −0.027⁎⁎⁎ − 0.023⁎⁎⁎ −0.025⁎⁎⁎ −0.021⁎⁎⁎ −0.022⁎⁎⁎ − 0.023⁎⁎⁎
(0.010) (0.008) (0.007) (0.007) (0.007) (0.007) (0.006)
Using conservative starting years −0.032⁎⁎⁎ −0.027⁎⁎⁎ − 0.026⁎⁎⁎ −0.025⁎⁎⁎ −0.026⁎⁎⁎ −0.024⁎⁎⁎ − 0.026⁎⁎⁎
(0.010) (0.008) (0.007) (0.008) (0.008) (0.007) (0.007)
Post-1990 sample −0.021⁎⁎ −0.027⁎⁎⁎ − 0.022⁎⁎⁎ −0.024⁎⁎⁎ −0.021⁎⁎⁎ −0.022⁎⁎⁎ − 0.023⁎⁎⁎
(0.009) (0.008) (0.007) (0.007) (0.007) (0.007) (0.007)
Adding DEBTGDP −0.015 −0.011 − 0.016⁎⁎ −0.016⁎⁎ −0.010 −0.017⁎⁎ − 0.017⁎⁎
(0.011) (0.008) (0.008) (0.008) (0.008) (0.008) (0.008)
Adding CBTOR5 −0.036⁎ −0.020 − 0.022⁎⁎⁎ −0.021⁎⁎ −0.022⁎⁎ −0.022⁎⁎ − 0.023⁎⁎⁎
(0.022) (0.018) (0.008) (0.009) (0.010) (0.011) (0.007)

Notes: A 0.06 fixed bandwidth and an Epanechnikov kernel are used for kernel and local linear regression matching. Bootstrapped standard errors are reported in parentheses. They
are based on 500 replications of the data. ⁎, ⁎⁎, and ⁎⁎⁎ indicate the significance level of 10%, 5%, and 1%, respectively.

For one additional year of policy adoption, the treatment effect on
lowering inflation becomes 0.5 percentage point larger.
In the fifth column, we investigate the necessity of a fiscal
discipline to assure the success of the inflation targeting regimes by
including a debt to GDP ratio and its cross product with the targeting
dummy. As expected, the interaction term is found to be positive and
statistically significant, meaning that inflation targeting policy is less
effective in lowering inflation in countries that have higher debt to
GDP ratios. The magnitudes of the estimated coefficients on the
targeting dummy and the interaction term suggest that inflation
targeting helps lower inflation only in countries with a debt to GDP
ratio below 71.4%.
Finally, in the last column, we include a fixed exchange rate
dummy variable FIX and an interaction term of IT ⁎ FIX to test whether
putting too much focus on limiting exchange rate movements makes
inflation targeting less effective. We find that, interestingly, although a
fixed exchange rate itself helps lower inflation, limiting exchange rate
movements under an inflation targeting regime actually makes
inflation targeting less effective in lowering inflation. In fact, the
results imply that the treatment effect on inflation would be zero if a
country attempts to maintain a hard or soft peg under an inflation
targeting regime.
Table 7 shows the estimated treatment effect on inflation
variability. Although the treatment effect on inflation variability is
still negative and significant in most cases, it is less heterogeneous
compared to the treatment effect on level of inflation. IT ⁎ TIME is the
only interaction term that is statistically significant. Furthermore, we
observe that self-selection is a less important issue in evaluating the
treatment effect on inflation variability for the propensity score
variable becomes insignificant in most of the regressions.
5. Conclusions
Previous work by Lin and Ye (2007) shows that inflation targeting
has no significant impacts on either inflation or inflation variability in
developed countries. In this study, we evaluate the treatment effect of
inflation targeting in thirteen developing countries that have adopted
this policy by the end of 2004. Using a variety of propensity score
matching methods, we show that the average treatment effect of
inflation targeting on inflation (variability) is quantitatively large and
statistically significant in targeting countries. On average, the
adoption of inflation targeting has led to a fall in the level of inflation
by nearly 3 percentage points. Our results suggest that the credibility
gain from an explicit announcement of an inflation target is more

Table 6 Table 7
Exploring heterogeneity in the treatment effect on level of inflation Exploring heterogeneity in the treatment effect on inflation variability

(1) (2) (3) (4) (5) (6) (1) (2) (3) (4) (5) (6)
IT −0.038⁎⁎⁎ −0.026⁎⁎⁎ −0.018⁎⁎ 0.001 − 0.025⁎⁎ −0.030⁎⁎⁎ IT −0.018⁎⁎⁎ −0.018⁎⁎⁎ −0.017⁎⁎⁎ −0.012⁎⁎⁎ − 0.0065 − 0.020⁎⁎⁎
(0.006) (0.007) (0.008) (0.009) (0.013) (0.007) (0.003) (0.004) (0.003) (0.004) (0.0064) (0.005)
PS −0.046⁎⁎⁎ −0.031 −0.044⁎⁎⁎ − 0.043⁎⁎ −0.295⁎⁎⁎ PS 0.0003 0.004 0.0007 0.014 − 0.060⁎⁎⁎
(0.017) (0.022) (0.016) (0.019) (0.026) (0.012) (0.017) (0.012) (0.015) (0.0017)
P P
IT ⁎ (PS − PS) −0.054⁎⁎ IT ⁎ (PS − PS) −0.011
(0.028) (0.018)
IT ⁎ TIME −0.005⁎⁎⁎ IT ⁎ TIME −0.001⁎⁎⁎
(0.001) (0.0004)
DEBTGDP − 0.00004 DEBTGDP 0.00007
(0.0001) (0.00007)
IT ⁎ DEBTGDP 0.00035⁎⁎ IT ⁎ DEBTGDP − 0.0001
(0.00018) (0.0001)
FIX −0.148⁎⁎⁎ FIX − 0.036⁎⁎⁎
(0.010) (0.006)
IT ⁎ FIX 0.030⁎⁎⁎ IT ⁎ FIX 0.007
(0.010) (0.007)

Notes: Constant terms are included but not reported. Robust standard errors are Notes: Constant terms are included but not reported. Robust standard errors are
reported in parentheses. ⁎, ⁎⁎, and ⁎⁎⁎ indicate the significance level of 10%, 5%, and 1%, reported in parentheses. ⁎, ⁎⁎, and ⁎⁎⁎ indicate the significance level of 10%, 5%, and 1%,
respectively. respectively.
 S. Lin, H. Ye / Journal of Development Economics 89 (2009) 118–123
substantial in the developing world. We also find that the effective-
ness of inflation targeting on lowering inflation is quite heterogeneous
within developing countries. The performance of a given inflation
targeting regime can be affected by country characteristics such as the
time length since the policy adoption, government's fiscal discipline,
central bank's desire to limit the movements of exchange rate, and its
willingness to meet the preconditions of policy adoption.
Acknowledgments
The authors would like to thank Lant Pritchett and two anonymous
referees for their valuable comments. Any remaining errors are ours.
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