Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation

This paper investigates whether the adoption of inflation targeting (IT), by strengthening central bank independence and maintaining inflation at low levels, has encouraged the governments of emerging economies to improve the collection of domestic tax revenue in order to recoup the loss of seigniorage revenue. Using the propensity score matching methodology, a micro-econometric methodology recently used in macroeconomics, we evaluate the ‘treatment effect’ of IT on fiscal mobilization in emerging countries that have adopted this monetary policy framework. Our empirical analysis, conducted on a sample of 59 countries (19 IT and 40 non-IT countries) for the period from 1980 to 2009, shows that on average IT adoption has had a large and significant positive effect on public revenue collection. Our results are confirmed by extensive robustness tests.