Role of Institutional Interaction for Financial Stability in the context of Inflation Targeting

  • Abderrazak El HIRI University Sidi Mohamed Ben Abdellah
  • salwa habiby University Sidi Mohamed Ben Abdellah
Keywords: financial stability, fiscal policy, inflation targeting, structural equation model


The Moroccan authorities are aiming for the implementation of an inflation targeting policy. However, the economy has a number of handicaps, including a high level of debt and modest financial stability. The purpose of this article is to analyze how the interaction between institutions could enhance financial stability and manage risks that could disrupt the smooth functioning of the market as part of an inflation-targeting regime, across two empirical studies. After studying the interaction between policies, we have developed a model of structural equations that integrates the specificities of the Moroccan economy and its institutions into a predictive vision. We found that the weight of debt influences negatively the financial market, but an application of inflation targeting can mitigate the severity of the financial and debt crisis on financial stability while keeping inflation and production close to their objectives. The results of this study encourage the transition in a medium-term to inflation targeting policy, since reducing the level of debt influence positively the expectations of economic agents.


Cogley, T. (1999). Should the Fed take deliberate steps to deflate asset price bubbles?. Economic Review-Federal Reserve Bank of San Francisco, (1), 42.

Stone, S. (2009). Asset Prices, Monetary Policy and Macroeconomic Stability.

Borio, C. E., & Drehmann, M. (2009). Assessing the risk of banking crises–revisited.

Woodford, M. (2012). Inflation targeting and financial stability (No. w17967). National Bureau of Economic Research.

Svensson, L. E. (2015). Monetary policy and macroprudential policy: different and separate. Canadian Journal of Economics.

Clerc, L. & Raymond, R. (2014). Les banques centrales et la stabilité financière : nouveau rôle, nouveau mandat, nouveaux défis ?. Revue d'économie financière, 113,(1), 193-214. doi:10.3917/ecofi.113.0193.

Abbas, S. A., Belhocine, N., El-Ganainy, A., & Horton, M. (2011). Historical patterns and dynamics of public debt—evidence from a new database. IMF Economic Review, 59(4), 717-742.

Amato, J. D., & Gerlach, S. (2002). Inflation targeting in emerging market and transition economies: Lessons after a decade. European Economic Review, 46(4-5), 781-790.

Mishkin, F. S. (2004). Can inflation targeting work in emerging market countries? (No. w10646). National Bureau of Economic Research.

Batini, N. (2006). Under what conditions can inflation targeting be adopted? The experience of emerging markets,” Central Bank of Chile Working Papers no.

Lucotte, Y. (2012). Adoption of inflation targeting and tax revenue performance in emerging market economies: An empirical investigation. Economic Systems, 36(4), 609-628.

Combes, J. L., Debrun, M. X., Minea, A., & Tapsoba, R. (2014). Inflation Targeting and Fiscal Rules: Do Interactions and Sequencing Matter? (No. 14-89). International Monetary Fund.

Wierts, P. (2007, December). Can Expenditure Rules Counter Expenditure Pressures from Revenue Windfalls?. In Paper for the ECB Public Finance Workshop of (Vol. 6).

Guichard, S., Kennedy, M., Wurzel, E., & André, C. (2007). What Affects Fiscal Consolidation?–Some Evidence from OECD Countries.

Debrun, X., Moulin, L., Turrini, A., Ayuso-i-Casals, J., & Kumar, M. S. (2008). Tied to the mast? National fiscal rules in the European Union. Economic Policy, 23(54), 298-362.

Medina, L., Caceres, C., & Corbacho, M. A. (2010). Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them? (No. 10-248). International Monetary Fund.

Wyplosz, C. (2012). Fiscal rules: Theoretical issues and historical experiences. In Fiscal policy after the financial Crisis(pp. 495-525). University of Chicago Press.

Mishkin, F. S. (2017). Rethinking monetary policy after the crisis. Journal of International Money and Finance, 73, 252-274.

El Hiri, A. (2018). Les déficits budgétaires au Maroc entre l'impératif de discipline et l'objectif de relance. Harmattan.

SAIDI A. (2017). Perspectives d’adoption du ciblage de l’inflation au Maroc. Journées Internationales de Macroéconomie et de Finance. Bank Al Maghrib. URL :

Lomax, R. G., & Schumacker, R. E. (2004). A beginner's guide to structural equation modeling. psychology press.

Akram, Q. F., & Eitrheim, Ø. (2008). Flexible inflation targeting and financial stability: Is it enough to stabilize inflation and output?. Journal of Banking & Finance, 32(7), 1242-1254.

Chin, W. W. (1998). The partial least squares approach to structural equation modeling. Modern methods for business research, 295(2), 295-336.

Tenenhaus, M., Vinzi, V. E., Chatelin, Y. M., & Lauro, C. (2005). PLS path modeling. Computational statistics & data analysis, 48(1), 159-205.

How to Cite
El HIRI, A., & habiby, salwa. (2018). Role of Institutional Interaction for Financial Stability in the context of Inflation Targeting. Advances in Social Sciences Research Journal, 5(9).