The Impact of Financial Development on Monetary Policy Efficiency and Inflation Targeting

Khalili Iraqi, Mansour; Barkhordari, Sajad; Gallavani, Amin

doi:10.30473/egdr.2019.48373.5369

Document Type : ORIGINAL ARTICLE

Authors

¹ Professor, Faculty of Economics, University of Tehran, Tehran, Iran

² Assistant Professor, Faculty of Economics, University of Tehran, Tehran, Iran

³ Ph.D. Student, Faculty of Economics, University of Tehran, Tehran, Iran

https://doi.org/10.30473/egdr.2019.48373.5369

Abstract

This study attempts to find out the impact of financial development on inflation targeting and monetary policy efficiency in OECD and OPEC countries for the period 2001-2017 based on annual data. For this purpose, the long-term inflation trend, which was extracted by the Hodrick Prescott (HP) filter, is considered as a proxy for the target inflation rate, and the difference between this proxy and the actual inflation rate was entered to the model as a dependent variable. Also, the broad-based index, which had been introduced by the International Monetary Fund (IMF) in 2016, optimized by using fuzzy logic, has been used as a proxy for financial development. The results show that in OPEC countries, financial development has been neutral on monetary policy efficiency through output growth, which is consistent with the monetary neutral theory, and also financial development strengthen the efficiency of inflation targeting in these countries. On the other hand, the study indicates in OECD countries, financial development has been neutral on monetary policy efficiency through output growth, and unlike in OPEC countries, financial development has been neutral on inflation targeting efficiency in the period under review. This confirms that a high level of financial development reduces the efficiency of inflation targeting.

Keywords

20.1001.1.22285954.1399.10.39.1.8

Main Subjects

Monetary policy

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Economic Growth and Development Research

The Impact of Financial Development on Monetary Policy Efficiency and Inflation Targeting

References

References

Volume 10, Issue 39
June 2020
Pages 15-28

The Impact of Financial Development on Monetary Policy Efficiency and Inflation Targeting

References

References

Volume 10, Issue 39June 2020Pages 15-28

Volume 10, Issue 39
June 2020
Pages 15-28