Policy Effects on Economic Well‐Being: Evaluating Inflation Targeting in Middle‐Income Nations

ABSTRACT This study evaluates whether the adoption of inflation targeting (IT) causally enhances real income growth and reduces inflation volatility in 16 middle‐income nations (MINs). The analysis employs Bayesian frameworks and dynamic difference‐in‐differences (DiD) to identify both short‐run and long‐run policy effects. The research contributes to the literature by reconciling mixed findings on IT through joint modeling of parameter instability and staggered treatment timing, and by providing extensive robustness checks. The principal contribution is an examination of whether IT frameworks serve as effective monetary policy instruments for both per capita GDP growth and price stability in emerging economies. The results indicate that only five countries exhibit transient post −IT improvements in GDP per capita, while pre −IT effects remain negligible. Dynamic DiD estimations corroborate these findings, showing statistically insignificant long‐term treatment effects across cohorts, with short‐term impacts dissipating within 5 years. The analysis concludes that IT frameworks in MINs fail to generate sustained income growth trajectories, although they effectively mitigate price volatility. These findings align with the theoretical predictions of monetary super‐neutrality in the long run, namely, that sustained changes in the rate of inflation, as governed by IT regimes, do not permanently alter real output trajectories.