EFFECTIVENESS OF MONETARY TRANSMISSION AND THE IMPACT OF INFLATION TARGETING STRATEGY: Evidence from Emerging Market Economies

Syed Zia ABBAS*, Syed Faizan IFTIKHAR** and Shaista ALAM***

The objective of this paper is to investigate the impact of inflation targeting strategy on monetary policy transmission mechanism by estimating the impact of deposit rate on consumption to GDP ratio in emerging market economies. The study considers sixteen years of annual data from 2001 to 2016 comprising of thirty-six emerging market economies (EMEs) including 16 inflation targeting countries and 20 non-inflation targeting countries. This study implies Generalized Method of Moments (GMM) for empirical investigation. The evaluation of transmission mechanism in the presence of inflation targeting strategy by estimating the impact of rate of interest on one of the significant components of aggregate demand, i.e., household consumption instead of output is the major contribution of this research. The study found a significant impact of inflation targeting on monetary policy transmission mechanism.

Keywords: Policy, Inflation Targeting, Private Consumption.