Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature

This paper surveys the empirical literature of inflation targeting. The main findings from our review are the following: there is robust empirical evidence that larger and more developed countries are more likely to adopt the IT regime; the introduction of this regime is conditional on previous disinflation, greater exchange rate flexibility, central bank independence, and higher level of financial development; the empirical evidence has failed to provide convincing evidence that IT itself may serve as an effective tool for stabilizing inflation expectations and for reducing inflation persistence; the empirical research focused on advanced economies has failed to provide convincing evidence on the beneficial effects of IT on inflation performance, while there is some evidence that the gains from the IT regime may have been more prevalent in the emerging market economies; there is not convincing evidence that IT is associated with either higher output growth or lower output variability; the empirical research suggests that IT may have differential effects on exchange-rate volatility in advanced economies versus EMEs; although the empirical evidence on the impact of IT on fiscal policy is quite limited, it supports the idea that IT indeed improves fiscal discipline; the empirical support to the proposition that IT is associated with lower disinflation costs seems to be rather weak. Therefore, the accumulated empirical literature implies that IT does not produce superior macroeconomic benefits in comparison with the alternative monetary strategies or, at most, they are quite modest.Comment: 109 pages, a survey of the empirical literature on macroeconomic effects of inflation targetin

The effects of macroeconomic policies under fixed exchange rates: A Bayesian VAR analysis

We analyse the effects of fiscal and monetary policies in Croatia and Macedonia estimated by a Bayesian vector autoregression (VAR). The main results of the study are as follows. Fiscal tightening leads to economic expansion in Macedonia and a decline in economic activity in Croatia. In both countries fiscal tightening leads to a decline in inflation and money market rates. Monetary tightening leads to output contraction and a decline in inflation in both countries. We find an opposite reaction of the fiscal authorities to a monetary shock, i.e., monetary contraction is accompanied by fiscal tightening in Croatia and by loose fiscal policy in Macedonia

Decentralization, fiscal transfers and income inequality in Central and Eastern European countries

Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend on the source of finance of sub-national governments, i.e. intergovernmental transfers might have a role in income equalization; third, we provide empirical support for the validity of the Kuznets-hypothesis in the CEE countries in which there is a nonlinear relationship between the level of economic development and income inequality

Decentralization, fiscal transfers and income inequality in Central and Eastern European countries

Although income redistribution is primarily a central government responsibility, decentralization can improve or deteriorate the equity in resource and income redistribution depending on how the process of decentralization is designed and implemented. This paper provides empirical evidence on the association between fiscal decentralization and income distribution for a panel of 11 economies from Central and Eastern Europe (CEE) during 1995-2011. In these regards, we focus on three research topics: the effect of decentralization on income inequality; the effects of the structure of local government finance on income inequality; and the validity of the Kuznets-hypothesis. The main findings from the empirical exercise are as follows: first, we cannot provide firm evidence on the presumes favourable effects of fiscal decentralization on income distribution in the CEE countries; second, our empirical model suggests that the effects of fiscal decentralization on income inequality depend on the source of finance of sub-national governments, i.e. intergovernmental transfers might have a role in income equalization; third, we provide empirical support for the validity of the Kuznets-hypothesis in the CEE countries in which there is a nonlinear relationship between the level of economic development and income inequality

Fiscal decentralization and government size across Europe

The paper provides for an empirical study of the association between fiscal decentralization and government size on a panel of 28 European developed and former transition countries during 1991-2011, controlling for the effects of various demographic, institutional, and macroeconomic variables as well as for the effects of the Global Financial Crisis. The main findings from the empirical investigation are as follows: We provide evidence for non-negligible effects of expenditure decentralization on government size, especially in the former transition economies. However, when we employ the revenue decentralization as an explanatory variable we cannot provide support to the Leviathan hypothesis. We include two measures of the vertical fiscal imbalance and provide empirical support to the common-pool hypothesis only for the former transition countries. As for the effects of the control variables, our research results suggest that higher public debt leads to larger government, while trade openness is associated with smaller government size. Also, we find that the effects of population density and dependent population on government size differs between the developed and the former transition countries, while higher degree of urbanization reduces government size only in the developed countries sub-sample. Finally, we confirm that the Global Financial Crisis has strong effects on the level of government expenditure across Europe

Decentralization and fiscal performance in Central and Eastern Europe

The paper provides empirical evidence on the association between decentralization and fiscal performance of the general government on a panel of 11 former transition countries during 1996-2012, controlling for the effects of various demographic, institutional, and macroeconomic variables. Also, for robustness check we make a comparison with a panel of 18 industrialized European economies. The main findings from the empirical investigation suggest that decentralizing government activities in Central and Eastern Europe leads to an increase in the efficiency in the provision of public goods. Also, we show that not only the extent of fiscal decentralization, but the composition of local revenue, too, matters for fiscal discipline. In these regards, providing local governments with higher autonomy in financing their activities by relying more on their “own” tax revenues instead of intergovernmental grants seems to be conducive with fiscal discipline. In contrast to the sample consisting of the former transition economies, we cannot find evidence on the association between decentralization and fiscal discipline in the developed European countries

Adopting inflation targeting in emerging markets: exploring the factors behind the decision

This paper examines the macroeconomic, financial, and institutional factors which affect the adoption of inflation targeting as a monetary policy strategy. We estimate a panel binary response model for 44 emerging market economies (EMEs) during 1990-2017. The main findings from our empirical investigation suggest that it is inflation and output growth volatility rather than inflation and output which matters for the adoption of IT in EMEs. In addition, we provide evidence that financial development, central bank independence, and capital mobility are associated with higher likelihood to adopt IT, whereas public debt has opposite effects. Finally, we show that, when deciding whether to adopt IT, policy makers take into consideration only medium-term macroeconomic, financial, and institutional conditions, while the longer-run historical performance becomes less relevant in the decision-making process

Fiscal Decentralization and Inflation in Central and Eastern Europe

Theoretical conceptions offer ambiguous suggestions about the precise sign of the association between decentralization and inflation (positive or negative). Given the different channels in which decentralization affects macroeconomic stability, this relationship becomes a matter of empirical research. This paper provides empirical evidence on the association between decentralization and inflation on a panel of 11 former transition economies from Central and Eastern Europe (CEE) over the 1991-2011 period. The main findings from our empirical study suggest that decentralizing government activities in CEE countries is conducive with lower inflation rates. Also, we show that not only the extent of fiscal decentralization, but the composition of local revenue, too, matters for macroeconomic stability. Finally, we show that the relationship between fiscal decentralization and inflation is non-linear, i.e. initially, decentralization has favourable effects on macroeconomic stability, but above some threshold, these effects disappear. In these regards, the result from our study are consistent with several theoretical explanations: the commitment theory, the theory of continuity, and the theory of collective action

Fiscal decentralization and government size across Europe

The paper provides for an empirical study of the association between fiscal decentralization and government size on a panel of 28 European developed and former transition countries during 1991-2011, controlling for the effects of various demographic, institutional, and macroeconomic variables as well as for the effects of the Global Financial Crisis. The main findings from the empirical investigation are as follows: We provide evidence for non-negligible effects of expenditure decentralization on government size, especially in the former transition economies. However, when we employ the revenue decentralization as an explanatory variable we cannot provide support to the Leviathan hypothesis. We include two measures of the vertical fiscal imbalance and provide empirical support to the common-pool hypothesis only for the former transition countries. As for the effects of the control variables, our research results suggest that higher public debt leads to larger government, while trade openness is associated with smaller government size. Also, we find that the effects of population density and dependent population on government size differs between the developed and the former transition countries, while higher degree of urbanization reduces government size only in the developed countries sub-sample. Finally, we confirm that the Global Financial Crisis has strong effects on the level of government expenditure across Europe