The aim of this paper is twofold. Firstly, it seeks to investigate the nature of the relationship between inflation targeting regime and foreign portfolio investment inflows. Secondly, it inquires whether inflation targeting is able to control for foreign portfolio investment inflows volatility in emerging countries or not. The sample covers the period ranging from 1986 until 2010 and contains 38 emerging countries, of which 13 countries have adopted inflation targeting regime. The impact of adopting inflation targeting regime on foreign portfolio investment inflows and their volatility is assessed quantitatively by making use of a relevant econometric methodology, namely a variant of the simulation techniques of a quasi-natural experiment, called the non-parametric PSM methodology while controlling for a set of macroeconomic and institutional variables. The paper results show that the enhancement effects of inflation targeting on foreign portfolio investment inflows are substantial and statistically significant, whatever the matching technique used. This would indicate that inflation targeting regime adoption is beneficial for emerging countries since it has permitted to attract more foreign portfolio investment inflows. On another front, these results tend to indicate that inflation targeting regime is rather contributing to amplifying portfolio investment volatility, albeit such finding is far from being robust and depends on the model specification and the matching technique used.
Keywords: Inflation Targeting, Propensity Score Matching, Portfolio Investment, Emerging Market Countries.
JEL Classification: E52, E58, E42