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Does Inflation Targeting Affect the Trade-Off between Output Gap and Inflation Variability?

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Author Info

  • Arestis, Philip
  • Caporale, Guglielmo Maria
  • Cipollini, Andrea

Abstract

We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade-off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade-off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non-targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation-targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal Manchester School.

Volume (Year): 70 (2002)
Issue (Month): 4 (Special Issue)
Pages: 528-45

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Handle: RePEc:bla:manchs:v:70:y:2002:i:4:p:528-45

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Cited by:
  1. Ivrendi, Mehmet & Guloglu, Bulent, 2010. "Monetary shocks, exchange rates and trade balances: Evidence from inflation targeting countries," Economic Modelling, Elsevier, Elsevier, vol. 27(5), pages 1144-1155, September.
  2. Philip Arestis & Malcolm Sawyer, 2002. "Can Monetary Policy Affect The Real Economy?," Macroeconomics, EconWPA 0209012, EconWPA.
  3. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers, University of Connecticut, Department of Economics 2005-06, University of Connecticut, Department of Economics.
  4. Siok Kun Sek & Wai Mun Har, 2012. "Does Inflation Targeting Work in Emerging East-Asian Economies?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 59(5), pages 599-608, December.
  5. P Arestis & A Mihailov, 2009. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economic Issues Journal Articles, Economic Issues, Economic Issues, vol. 14(2), pages 27-54, September.
  6. Metin Ozdemir & Selim Tuzunturk, 2009. "Is price stability enough? Macroeconomic performance of inflation targeting in developing countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, Inderscience Enterprises Ltd, vol. 1(4), pages 352-372.
  7. International Monetary Fund, 2005. "Inflation Targeting and Output Growth," IMF Working Papers 05/89, International Monetary Fund.
  8. WenShwo Fang & Stephen M. Miller & ChunShen Lee, 2009. "Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance," Working Papers, University of Nevada, Las Vegas , Department of Economics 0920, University of Nevada, Las Vegas , Department of Economics.
  9. Nathan Perry & Nathaniel Cline, 2013. "Wages, Exchange Rates, and the Great Inflation Moderation: A Post-Keynesian View," Economics Working Paper Archive wp_759, Levy Economics Institute.
  10. repec:rdg:wpaper:em-dp2007-53 is not listed on IDEAS
  11. WenShwo Fang & Stephen M. Miller & ChunShen Lee, 2009. "Short- and Long-Run Differences in the Treatment Effects of Inflation Targeting on Developed and Developing Countries," Working Papers, University of Nevada, Las Vegas , Department of Economics 1003, University of Nevada, Las Vegas , Department of Economics, revised Aug 2010.
  12. Hakan Berument & Ebru Yuksel, 2007. "Effects of Adopting Inflation Targeting Regimes on Inflation Variability," Departmental Working Papers, Bilkent University, Department of Economics 0702, Bilkent University, Department of Economics.
  13. Jan Libich, 2006. "Inflexibility Of Inflation Targeting Revisited: Modeling The "Anchoring"Effect," CAMA Working Papers 2006-02, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  14. Stephen M. Miller & WenShwo Fang & Ozkan Eren, 2012. "Inflation Targeting: Does It Improve Economic Performance?," Working Papers, University of Nevada, Las Vegas , Department of Economics 1207, University of Nevada, Las Vegas , Department of Economics.

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