The Impact of Inflation Targeting on Public Debt: An Evidence from Propensity Score Matching Approach

Abstract

This study uses the Propensity Score Matching (PSM) approach to examine the impact of adopting the Inflation Targeting (IT) policy on internal and external public debt both for the groups of advanced and developing economies. We investigate the matching results to estimate the Average Treatment Effect (ATE) and Average Treatment Effect on the Treated (ATT) by employing different matching methods of nearest-neighbor, radius, stratification, and kernel matching. Our results are robust and statistically significantly reveal that adopting the IT policy reduces external public debt both for developed and developing economies. Moreover, on average, the adoption of IT policy leads to a statistically significant reduction of internal public debt for developing economies.

Keywords

• Propensity Score Matching
• Inflation Targeting
• Public Debt

Enflasyon Hedeflemesinin Kamu Borçlarına Etkisi: Eğilim Skoru Eşleştirme Yöntemleri ile Analizi

Abstract

Bu çalışma, enflasyon hedeflemesi politikasının iç ve dış kamu borcu üzerindeki etkisini gelişmiş ve gelişmekte olan ülke gurupları için eğilim skoru eşleştirme yöntemini kullanarak inceler. Enflasyon hedeflemesi rejiminin ortalama işlem etkisi ile işleme tabi olanlar üzerindeki ortalama işlem etkilerini tahmin etmek için en yakın komşu eşleştirme, radyan, katmanlaştırma ve kernel eşleştirme olmak üzere dört eşleştirme yöntemi ile analiz eder. Sonuçlar, enflasyon hedeflemesi politikasının dış kamu borcunu hem gelişmiş hem de gelişmekte olan ekonomiler için azalttığını güçlü ve istatistiksel olarak anlamlı şekilde ortaya koyar. Ayrıca enflasyon hedeflemesi uygulanmasının gelişmekte olan ekonomilerde iç kamu borcunu azalttığı istatistiksel olarak anlamlı şekilde ortaya konulur.

Keywords

• Eğilim Skoru Eşleştirme
• Enflasyon Hedeflemesi
• Kamu Borcu

References

1. Ahmad, M. J., Sheikh, M. R., & Tariq, K. (2012), "Domestic debt and inflationary effects: An evidence from Pakistan," International Journal of Humanities and Social Science, 2(18), 256-263.
2. Akitoby, B., Komatsuzaki, T., & Binder, A. (2014), "Inflation and Public Debt Reversals in the G7 Countries," IMF Working Papers, WP/14/96.
3. Ball, L. M. (2013), "The case for four percent inflation," working paper, (No. 607).
4. Ball, L. M., & Sheridan, N. (2004), "Does inflation targeting matter?", The inflation-targeting debate (pp. 249-282). University of Chicago Press.
5. Baycan, I. O. (2016), "The Effects of Exchange Rate Regimes on Economic Growth: Evidence from Propensity Score Matching Estimates, Journal of Applied Statistics, 43 (5), 914-924
6. Bildirici, M., & Ersin, O. O. (2007), "Domestic debt, inflation, and economic crises: a panel cointegration application to emerging and developed economies," Applied Econometrics and international development, 7(1).
7. Blanchard, O., Dell'Ariccia, G., & Mauro, P. (2010), "Rethinking macroeconomic policy," Journal of Money, Credit and Banking, 42, 199-215.
8. Bousrih J. (2011), “L’adoption de la politique de ciblage de l’inflation dans les marchés émergents : apport théorique et validation empirique. Economies et finances. Université Rennes 1, 2011. Français. tel-00646573

9. Cecchetti, S. G., & Ehrmann, M. (1999), "Does inflation targeting increase output volatility? An international comparison of policymakers' preferences and outcomes", (No. w7426), National bureau of economic research.
10. De Mendonça, H. F., & e Souza, G. J. D. G. (2012), "Is inflation targeting a good remedy to control inflation?", Journal of Development Economics, 98(2), 178-191.
11. Dueker, M., and Fischer, A. M. (1996), "Inflation targeting in a small open economy: Empirical results for Switzerland." Journal of Monetary Economics 37.1: 89-103.
12. Hammond, G. (2011), "State of the Art of Inflation Targeting," Centre for Central BankingStudies Handbook No. 29, London: Bank of England.
13. Harmon, E. Y. (2012), "The impact of public debt on inflation, GDP growth, and Interest rates in Kenya" (Doctoral dissertation).
14. Hilscher, J., Raviv, A., & Reis, R. (2014), “Inflating away the public debt? An empirical assessment (No. w20339)," National Bureau of Economic Research.
15. Kannan, R., & Singh, B. (2007), "Debt-deficit dynamics in India and macroeconomic effects: A structural approach," MPRA Paper No. 16480.
16. Kwon, G., McFarlane, L., & Robinson, W. (2006), "Public Debt, Money Supply, and Inflation: A Cross-Country Study and its Application to Jamaica," International Monetary Fund (IMF) Research Paper Series.
17. Lin, S., & Ye, H. (2007), "Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries," Journal of Monetary Economics, 54(8), 2521-2533.
18. Lin, S., & Ye, H. (2009), "Does inflation targeting make a difference in developing countries?", Journal of Development Economics, 89(1), 118-123. Majid T. 2000, "Debt, growth, and inflation in large European economies: a vector auto-regression analysis," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 159-173.
19. Nastansky, A., Mehnert, A. and Strohe, H. G. (2014), “A Vector Error Correction Model for the Relationship between Public Debt and Inflation in Germany”, No 51, Statistische Diskussionsbeiträge, Universität Potsdam, Wirtschafts-und Sozialwissenschaftliche Fakultät.
20. Nguyen, B. (2015), "Effects of fiscal deficit and money M2 supply on inflation: Evidence from selected economies of Asia," Journal of Economics, Finance and Administrative Science, 20, 49-53.
21. Obi, B., & Nurudeen, A. (2009), "Do Fiscal Deficits Raise Interest Rates in Nigeria? A Vector Autoregression Approach," Journal of Applied Quantitative Methods, 4(3).
22. Persson, T. (2001), "Currency unions and trade: how large is the treatment effect?", Economic Policy, 16(33), 434-448.
23. Roger, S. (2010), "Inflation Targeting Turns 20," Finance & Development 47, No. 1, 46-49.
24. Rose, A. K. (2007), "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, 26(5), 663-681.
25. Rosenbaum, P. R. (2002), "Overt bias in observational studies," In Observational studies (pp. 71-104), Springer, New York, NY.
26. Rosenbaum, P. R., & Rubin, D. B. (1983), "The central role of the propensity score in observational studies for causal effects," Biometrika, 70(1), 41-55.
27. Sargent, T. J., & Wallace, N. (1981), "Rational Expectations and the theory of economic policy," Rational expectations and econometric practice, 1, 199-214.
28. Svensson, L. E. (1997), "Inflation forecast targeting: Implementing and monitoring inflation targets," European economic review, 41(6), 1111-1146.
29. Svensson, L. E. (1999), "Inflation targeting as a monetary policy rule," Journal of monetary economics, 43(3), 607-654.
30. Svensson, L. E. (2002), "Inflation targeting: should it be modeled as an instrument rule or a targeting rule?" European Economic Review, 46(4-5), 771-780.
31. Van Bon, N. (2015), "The relationship between public debt and inflation in developing countries: Empirical evidence based on difference panel GMM," Asian Journal of Empirical Research, 5(9), 128-142.
32. Vasileva, I. (2018), "The Effect of Inflation Targeting on Foreign Direct Investment Flows to Developing Countries," Atlantic Economic Journal, 46(4), 459-470.
33. Vega, M., & Winkelried, D. (2005), "Inflation targeting and inflation behavior: a successful story?" International Journal of Central Banking, 1(3), 153-175.
34. Wheeler, M. (1999), "The macroeconomic impacts of government debt: An empirical analysis of the 1980s and 1990s," Atlantic Economic Journal, 27(3), 273-284.