Does inflation targeting matter for price stability?

Since New Zealand embraced Inflation Targeting (IT) as a monetary policy in 1990, numerous countries have followed suit. The inherent high accountability and transparency associated with central banks operating under an IT policy are anticipated to facilitate the attainment of price stability. This study aims to investigate the potential positive impact of IT policy on price stability by examining whether its implementation results in shorter durations of High Inflation Episodes (HIEs). HIEs are defined as periods during which a country experiences sustained and consecutive high inflation rates for a specific duration. We employ Survival Analysis with data spanning from 1980: Q1 to 2022: Q4 to explore this aspect. Our research reveals a significant decline in the average duration of High Inflation Episodes (HIEs) following the implementation of the Inflation Targeting (IT) policy. Furthermore, our analysis indicates that, within countries employing inflation targeting, the period during which inflation rates remain below the lower bound of the IT target range is comparatively shorter than the duration above the upper bound. These findings imply that inflation targeting policies play a crucial role in fostering price stability, even amid the backdrop of escalating inflation rates-a phenomenon witnessed across various nations since the advent of the COVID-19 pandemic in 2020. Consequently, we assert that the IT policy effectively contributes to achieving price stability, a key objective of this monetary approach.