Inflation Targeting and Developing Countries’ Performance : Evidence from Firm-Level Data

We examine the impact of inflation targeting on manufacturing firm performance for a panel of 30,993 firms in 46 developing countries from 2006 to 2020. Using the entropy balancing method, thus mitigating potential endogeneity issues, we show that inflation targeting increases firm growth and productivity in targeting countries compared to non-targeting ones. Our findings are economically meaningful and robust to various checks. Moreover, we provide evidence that our results are not biased towards unobservables nor are they confounded with the effects induced by other reforms, such as IMF programs. The paper further examines a few heterogeneity features of the monetary framework, depending on some factors. Specifically, economic and institutional factors such as the quality of regulation, fiscal discipline, central bank deviations from the announced target and natural resource endowments also influence the link between the monetary regime and firm performance. Finally, we explore the main transmission channels and identify monetary policy credibility as the key driver of the regime’s effectiveness