Abstract
The study investigates the impact of inflation-targeting monetary policies on financial stability across developed and emerging economies, filling a critical gap in the literature regarding the effectiveness of these policies beyond price stability. While inflation targeting is widely used to manage inflation, its influence on financial stability, particularly in different economic contexts, remains underexplored. This research aims to address this gap by assessing the ability of inflation-targeting regimes to maintain financial stability, considering the level of a country’s economic development. Using survival analysis techniques, including the Kaplan-Meier estimation and the Cox proportional hazards model, the study examines panel data from 13 countries (6 developed and 7 emerging economies) over a 23-year period (2001-2023). It compares the financial stability of developed and emerging economies by analyzing macroeconomic, stock market, and banking-sector variables, which contribute to a macro-financial stability index. The analysis employs non-parametric and semi-parametric methods to estimate survival functions and hazard ratios, providing insights into the duration of financial stability under different economic conditions. The findings reveal significant differences between developed and emerging economies in terms of financial stability outcomes. Developed economies show higher survival probabilities, reflecting better resilience to financial instability. In contrast, emerging economies exhibit more rapid declines in survival probabilities, indicating greater susceptibility to external shocks and economic volatility. The results suggest that liquidity, net foreign assets, and interest rates impact financial stability differently based on the development level. The study’s policy recommendations call for stronger macroprudential measures in emerging economies, such as enhancing regulatory frameworks, managing foreign exchange risks, and implementing flexible inflation-targeting policies that incorporate financial stability concerns. These findings advocate for a more comprehensive approach to monetary policy that goes beyond inflation control and considers financial stability, tailored to a country's economic stage. The comparative analysis of 13 countries highlights that developed economies benefit from stable institutional frameworks that strengthen
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monetary policy efficacy. In contrast, emerging economies require targeted policy interventions to address challenges associated with higher economic volatility, weaker financial institutions, and currency fluctuations. The study contributes to the debate on balancing price and financial stability in monetary policy, offering insights into optimal practices for diverse economic environments.
Key words: Inflation targeting, Monetary Policy, Financial Stability, Survival Analysis, Kaplan-Meier, Cox Model, Banking Sector, Stock Market, Macroeconomic Level.