Inflation Targeting Adoption And Institutional Quality: Evidence From Developing Countries

Institutional quality is often emphasised as an engine of economic development in developing countries. However, most of the literature assumes that institutions are exogenous. In this paper, we adopt the opposite view, and study the way the design of the monetary regime, and specifically the adoption of an inflation targeting regime, can impact the quality of institutions. Using the propensity scores matching method, which allows controlling for self-selection in policy adoption, along with a wide set of robustness checks, including GMM-based estimations and controlling for unobserved heterogeneity, we find that the adoption of inflation targeting significantly improves the quality of institutions.