Inflation targeting and financial stability: a cross-country comparison of emerging and developed economies

Abstract

Purpose The study investigates the impact of inflation-targeting monetary policies on financial stability across developed and emerging economies, addressing a critical gap in understanding their broader implications beyond price stability. It aims to assess the ability of inflation-targeting regimes to sustain financial stability in diverse economic contexts. Design/methodology/approach The research employs survival analysis techniques, including Kaplan–Meier estimation and the Cox proportional hazards model, to analyse panel data from 13 countries (six developed and seven emerging economies) over 23 years. A Macro-Financial Stability Index is constructed using macroeconomic, stock market and banking-sector variables, with non-parametric and semi-parametric methods estimating survival functions and hazard ratios. Findings The findings reveal differences between developed and emerging economies. Developed economies demonstrate higher survival probabilities, reflecting resilience to financial instability due to robust institutional frameworks. Emerging economies show more rapid declines in survival probabilities, highlighting vulnerabilities to external shocks and economic volatility. Research limitations/implications The study is limited to 13 countries over 23 years, excluding other inflation-targeting experiences. Expanding the dataset could enhance the findings. Results underscore the need for tailored inflation-targeting policies to address the distinct challenges of emerging economies. Originality/value This study applies survival analysis to assess the duration of financial stability under inflation-targeting regimes, offering a comparative analysis of developed and emerging economies. It highlights the importance of integrating macroprudential measures into monetary policy, for enhancing resilience in emerging markets.