Inflation Targeting as a Shock Absorber

We study the characteristics of inflation targeting as a shock absorber in response to large shocks in the form of natural disasters for a sample of 76 countries over the period 1970-2015. We find that inflation targeting improves macroeconomic performance following such shocks as it lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a stronger response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.