Is inflation targeting effective? Lessons from global financial crisis and COVID-19 pandemic

This paper explores the influence of inflation targeting (IT) policy on macroeconomic performance in 24 Asian economies by taking a wide range of macroeconomic variables from 2001 to 2022. Specifically, the study seeks to evaluate the influence of IT on macroeconomic performance during the global financial crisis (GFC) and the COVID-19 pandemic periods separately. The empirical analysis comprises three approaches: propensity score matching, difference-in-differences, and panel-corrected standard error methods. The empirical investigation reveals that IT significantly impacts inflation and its volatility during the GFC. In contrast, the effect on the unemployment rate is not statistically significant. Further, IT statistically influences the inflation and unemployment rates throughout the COVID-19 pandemic. In contrast, its impact on inflation volatility during the COVID-19 pandemic is not evident. Our results have significant policy implications for the Asian economies. It may be suggested that low-income countries could benefit from implementing IT policy as a tool to ensure stable inflation. However, there is a need for continuous policy adaptation and targeted interventions to address evolving economic challenges, especially in situations like crises.