Inflation targeting under political pressure

Abstract

Historically, many emerging economies, particularly in Latin America, battled against persistently high and volatile inflation. Today, emerging economies continue to experience higher inflation than developed ones, and their central banks deviate more frequently from inflation targets. These patterns partly reflect the added political pressure and a lower degree of independence faced by central banks in emerging markets. For example, Aisen and Veiga (2006, 2008) find that inflation is higher and more volatile in countries with a lower quality of political institutions and a higher degree of political instability. By using a narrative approach, Binder (2018) finds that, on average, ten percent of central banks face political pressure and that this pressure is associated with higher inflation and inflation persistence.