ISSN: 2056-3736 (Online Version) | 2056-3728 (Print Version)

Does Institutional Quality matter to the Inflation Targeting-Financial Stability Nexus?

Adel Bogari

Correspondence: Adel Bogari,

Associate Professor, College of Business Administration, Al-Baha University, KSA

pdf (429.77 Kb) | doi:


This study examines the quality institutions role played in the inflation targeting- financial stability nexus. A sample of 65 developed and developing countries, including 33 inflation-targeting countries (10 developed and 23 developing), and 32 non-inflation-targeting countries (12 developed and 20 developing), during the 1996 - 2020 period. Using Two Step GMM estimation, results show that inflation targeting stimulates financial stability. This positive relationship between inflation targeting and financial stability is proved, regardless of the inflation targeting regime in place; Soft or Full-Fledged. Results from institutional quality variables prove that inflation-targeting countries with poor institutional quality are financially vulnerable, and that for good institutional quality are able to promote financial stability.


  Inflation targeting, Financial stability, Developed and developing countries, Quality of institutions, Tow Step GMM System.


Aaron, M., & James.Y. (2018). Are Inflation Targets Credible? A Novel Test, Economics Letters. Vol. 167, pp. 67–70.

Alpanda, S., & Honig, A. (2014). The Impact of Central Bank Independence on the Performance of Inflation Targeting Regimes, Journal of International Money and Finance, Vol.44, pp.118–135.

Arellano, M., & Bond, S. (1991). Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Review of Economic Studies, 58(2), 277–297.

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51.

Balke, N. & Fomby, T. (1997). Threshold Cointegration.  International Economic Review, Vol.38, N :3, pp. 627–645.

Bean, C. (2009). The Meaning of Internal Balance thirty years on, Economic Journal, Vol.119, pp. 442–460.

Berger, W., & Kißmer, F. (2013). Central Bank Independence and Financial Stability: A Tale of Perfect Harmony?, European Journal of Political Economy, Vol.31, pp.109–118.

Bernanke, B. & Gertler, M. (2000). Monetary Policy and Asset Price Volatility, Working paper N: 7559. National Bureau of Economic Research.

Bernanke, B. S., Gertler, M., & Gilchrist, S. (1999). The financial accelerator in a quantitative business cycle framework. In Taylor, J. B. and Woodford, M., editors, Handbook of Macroeconomics, volume 1 of Handbook of Macroeconomics, chapter 21, pages 1341–1393. Elsevier

Blanchard, O.& Galí, J. (2007). Real Wage Rigidities and The New Keynesian Model, Journal of Money, Credit and Banking, Vol.39, pp. 35–65.

Borio, C. & Zhu, H. (2008). Capital Regulation, Risk-Taking and Monetary Policy: Amissing Link in The Transmission Mechanism?. BIS Working Papers, 8, 236-251.

Borio, C., English, W. & Filardo, A. (2003). A Tale of Two Perspectives: Old or New Challenges for Monetary Policy?, In BIS Papers Chapters. pp. 1–59. Bank for International Settlements.

Dell’ariccia, G., Laeven, L. & Suarez, G. A. (2017). Bank Leverage and Monetary Policy’s Risk-Taking Channel: Evidence from The United States, The Journal of Finance, Vol.72, pp .613– 654.

Diamond, D. & Dybvig, P. (1983). Bank Runs, Deposit Insurance, and Liquidity, The Journal of Political Economy, Vol.91, pp. 401-419.

Elsayed,A.H., Naifer, N. & Nasreen,S. (2022). Financial Stability and Monetary Policy Reaction: Evidence from the GCC Countries, Quarterly Review of Economics and Finance, pp.1-10.

Fazio, D. M., Silva, T. C., Tabak, B. M.& Cajueiro, D. O. (2018). Inflation Targeting and Financial Stability: Does the Quality of Institutions Matter?, Economic Modelling, N : 71, pp. 1–15.

Fazio, D. M., Tabak, B. M. & Cajueiro, D. O. (2015). Inflation Targeting: Is IT to Blame for Banking System Instability? , Journal of Banking and Finance, Vol.59, pp.76–97.

Fisher, I. (1933). The Debt-Deflation Theory of Great Depressions, Journal of the Econometric Society,Vol. 1, pp.337-357.

Fouejieu, A. A. (2017). Inflation Targeting and Financial Stability in Emerging Markets, Economic Modelling, N: 60, pp. 51–70.

Frappa, S. & Mésonnier, J.-S. (2010). The Housing Price Boom of The Late 1990s: Did Inflation Targeting Matter?, Journal of Financial Stability, Vol.6, N : 4, pp .243–254.

Hadhri,S. (2021). The Nexus, Downside Risk and Asset Allocation between Oil and Islamic Stock Markets: A Cross-Country Analysis, Energy Economics, Vol.101, Article 105448.

Hove, S., Tchana, F. & Touna Mama, A. (2017). Do Monetary, Fiscal and Financial  Institutions Really Matter for Inflation Targeting in Emerging Market Economies ? , Research in  International Business and Finance, N : 39, pp.128–149.

Issing, O. (2009). In Search of Monetary Stability: The Evolution of Monetary Policy. BIS Working Papers No 273

Jiménez, G., Ongena, S., Peydró, J.-L., & Saurina, J. (2014). Hazardous Times for Monetary Policy: What do Twenty-Three Million Bank Loans Say about the Effects of Monetary Policy on Credit Risk-Taking?, Econometrica, Vol.82, pp.463–505.

Kapetanios, G., Pesaran, H. & Yamagata, T. (2006). Panels with Non Stationary Multifactor Error Structures, Journal of Econometrics, Vol.160. (2), pp. 326-348.

Kaufmann D, Kraay A, Mastruzzi M (2011). The worldwide governance indicators: methodology and analytical issues. Hague J Rule Law 3(02):220–246. S1876404511200046

Kim, S.& Mehrotra, A. (2017). Managing Price and Financial Stability Objectives in Inflation Targeting Economies in Asia and the Pacific , Journal of Financial Stability, N : 29, pp. 106–116.

Kindleberger, C.P. (1978). Manias, Panics and Crashes, A History of Financial Crises,  Basic Books, New York.

Martin, C. & Milas, C. (2013).  Financial Crises and Monetary Policy: Evidence from the UK, Journal of Financial Stability,Vol. 9, N :4, pp.654–661.

Minea,A., Tapsoba,R. & Villieu,P.(2020). Inflation Targeting Adoption and Institutional Quality: Evidence from Developing Countries, The World Economy-Wiley, pp.2107-2127.

Minsky, H. (1982). Can” it” Happen Again? : Essays on Instability and Finance , ME Sharpe Armonk, New York.

Mishkin, F. (2000). InflationTargeting in Emerging-Market Countries, American Economic   Review, Vol. 90, N :2, pp.105-109.

Mishkin, F. S. (1991). Asymmetric Information and Financial Crises: A Historical Perspective, Financial Markets and Financial Crises, Hubbard R G, University Of Chicago Press.

Owoundi, J.P.F., Mbassi, M. C. & Ownoudi.F. (2021). Does Inflation Targeting Weaken  Financial Stability ? Assessing The Role of Institutional Quality, The Quarterly Review of Economics and Finance, Vol.80, pp.376-378.

Ozan. E., Neslihan, K.b., & Umit, O. (2017). A Comparison of Optimal Policy Rules Prior to and During Inflation Targeting: Empirical Evidence from Bank of Canada, Applied Economics. Vol. 49, N: 39, pp.3899–3911.

Schwartz, A. J. (1995). Why Financial Stability Depends on Price Stability, Economic Affairs, Vol.15, pp. 21–25.

Shin, Y., Yu, B. & Greenwood-Nimmo, M. (2014). Modelling Asymmetric Cointegration and Dynamic Multipliers in a Nonlinear ARDL Framework, Festschrift in honor of Peter Schmidt. New York, NY: Springer, pp.281–314.

Svensson, L. E. O. (2010). Inflation Targeting. In Handbook of Monetary Economics, Elsevier, pp. 1237–1302.

Svensson, L.E.O. (1997). Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets, European Economic Review, Vol. 41, pp.1111-1146.

Svensson,L.E.O.(1999). Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability, Bureau national de la recherche économique, Document de travail, N : 7276, Cambridge.

Tas, B., & Peker, M. (2017). Inflation Target Credibility: Do the Financial Markets Find the Targets Believable ? , Oxford Bulletin of Economics and Statistics, Vol.79, N : 6, pp.1125–1147.

Taylor, M. P. & Davradakis, E. (2006). Interest Rate Setting and Inflation Targeting: Evidence of a Nonlinear Taylor Rule for The United Kingdom, Studies in Nonlinear Dynamics & Econometrics,Vol. 10,N : 4.

Umar,M. & Wen, J. (2020).  Does Inflation Targeting Cause Financial Instability? An Empirical Test of Paradox of Credibility Hypothesis, North American Journal of Economics and Finance, Vol.52, pp.101-164.

White, W. R. (2006). Is Price Stability Enough?, BIS Working Papers. Bank for International Settlements, N: 205.