The choice of inflation targeting

Abstract

This paper assesses empirically the contribution of key macroeconomic and institutional variables in shaping the likelihood of choosing the In°ation Targeting (IT) regime in a sample that comprises countries working under such a regime and covers the period 1975- 2005. I ¯nd in°ation rate, ¯nancial development, GDP per capita and trade openness relevant for driving the choice of IT by estimating a discrete choice panel data model. Also, my results suggest that the initial conditions at the moment of IT adoption do matter because countries have di®erent exposure to the likelihood of choosing IT as a result of their speci¯c macroeconomic and institutional fundamentals and unobservable idiosyncratic factors.