Date of Award

August 2015

Degree Type


Degree Name

Doctor of Philosophy



First Advisor

Narayan Kundan Kishor

Second Advisor

Suyong Song

Committee Members

Mohsen Bahmani-Oskooee, Niloy Bose, Rebecca Neumann


Inflation Targeting, Monetary Policy, Nonparametric Estimation, Propensity Score Analysis, Semiparametric Estimation, Treatment Effect


The main objective of my dissertation is to examine the causal effect

of monetary policy. The first two chapters focus on the effectiveness

of inflation targeting considering the role of preconditions such as

institutional independence of central banks and a healthy financial

system. It also analyzes the time-varying behavior of the inflation

gap in all explicit inflation targeting countries and captures the

gradual transition of actual inflation to its target over time. The

last chapter examines monetary unification impact on bond markets before and after the European crisis.

Chapter 2 estimates the treatment effect of inflation

targeting for 27 explicit inflation targeting countries. Our approach

takes into account the problem of model misspecification and

inconsistent estimation of parametric propensity scores by using a

nonparametric series estimator and semiparametric single index

method. In addition, this chapter also examines the impact of

inflation targeting regime on a wider set of macroeconomic

outcomes. The findings suggest that the results are sensitive to the

choice of propensity score estimates based on different methods, and

the semiparametric single-index model of propensity score provides the

most economically meaningful results. The findings illustrate that the

inflation targeting framework lowers inflation variability and

improves fiscal discipline. We find that this monetary policy regime

reduces the real exchange rate volatility in developing countries but

increases it in developed economies.

Chapter 3 analyzes the performance of the central banks by examining their success in achieving their

explicit inflation targets. For this purpose, we decompose the

inflation gap into predictable and unpredictable components. We argue that

the central banks are successful if the predictable component in the inflation

gap diminishes over time. The predictable component of inflation gap

is measured by the conditional mean of a parsimonious time-varying autoregressive

model. Our results find considerable heterogeneity

in the success of these IT countries in achieving their targets at the

start of this policy regime. Our findings also suggest that the

central banks of inflation targeting countries started targeting inflation

implicitly before becoming an explicit inflation targeter. The panel

data analysis suggests that the relative success of these countries in

reducing the gap is influenced by their institutional


Chapter 4 determines the behavior of bond yields in Eurozone by examining the antithetic role of monetary unification before and after the European Debt Crisis. We study the causal effect of monetary unification on the European bond markets. We capture the causal effect by estimating treatment effects of European union. The findings illustrate that the treatment effects on bond yields varies before and after the European crisis. The results indicate that monetary unification reduces the level and volatility of long-term and short-term sovereign bond yields for the period before the crisis, 1993--2008. However, after the banking crisis, we witnessed a rise in yield spreads due to higher degree of debt-GDP ratios and higher risk of default in sovereign bonds.

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Economics Commons