The Role of Preconditions of Inflation Targeting on the Macroeconomic Performance of Inflation Targeting Regimes

Over the last twenty years, inflation targeting frameworks have become increasingly popular. The main feature of such a framework is the public announcement by the central bank that it will keep inflation at or near a numerical inflation target. A large literature addresses preconditions that a country should satisfy before adopting this framework. However, there is much debate about whether satisfying these preconditions are essential. To address this debate, I focus on two common preconditions of inflation targeting: namely central bank independence, and the existence of stable and predictable relationships between monetary instruments and inflation. In this thesis, I study seventeen inflation targeting and eighteen non-inflation targeting countries. To assess the effects of preconditions on post-inflation targeting macroeconomic performance, I use a differencein- difference method. I use five economic indicators as a measure of performance: namely GDP, the volatility of GDP, inflation, the volatility of inflation, and an output inflation variability ratio. I find that countries that satisfied all preconditions before adopting inflation targeting experienced low inflation in the short run and successfully implemented their inflation targeting frameworks, as compared to countries that did not satisfy the preconditions