Monetary targeting and financial system characteristics: An empirical analysis

This paper investigates how reforms and characteristics of the financial system affect the likelihood of countries to abandon their strategy of monetary targeting. Apart from financial system characteristics, we include macroeconomic, fiscal, and institutional factors potentially associated with countries’ choices to give up monetary targeting. Panel logit models are estimated on a sample of 35 monetary targeting countries over the period 1975-2009. The findings suggest that financial liberalization, deregulation, and development as well as dollarization significantly increase the likelihood to abandon monetary targeting. Additionally, more developed countries with lower inflation and larger fiscal deficits are more likely to quit this monetary strategy. However, the financial determinants of abandoning monetary targeting differ between advanced and emerging and developing countries.