Macroeconomic Adjustment under Inflation-Targeting and Non-Targeting Regimes: Evidence from African Economies

<title>Abstract</title> <p>This paper investigates the influence of monetary policy regimes on macroeconomic adjustment in Africa with a distinction between inflation-targeting (IT) and non-inflation-targeting (NIT) regimes. Applying Panel Vector Error Correction Models (PVECM) and Panel Vector Autoregressions (PVAR) techniques, the paper analyses annual data from 2000 to 2024 for six countries and jointly identifies long-run equilibrium relations and short-run adjustments to shocks. The empirical specification accounts for the interplay of inflation, output growth, exchange rate, and fiscal balances in a regime-dependent context. The results show a clear regime-dependent pattern. Inflation-targeting (IT) countries display greater macroeconomic stability in terms of less inflation persistence, faster reversion to the long-run equilibrium, and less sensitivity of output and exchange rates to inflation innovations. In contrast, non-inflation-targeting (NIT) nations exhibit slower adjustment, greater inflation volatility, and stronger pass-through from the exchange rate, suggesting a more fragile transmission mechanism and greater vulnerability to fiscal and external shocks. It also reconfirms that inflation shocks are transitory under IT regimes, but have more persistent and destabilizing effects under NIT regimes. In sum, the results underscore the importance of policy credibility and expectations anchoring and suggest that the success of inflation targeting heavily relies on complementary institutional factors.</p>