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Inflation targeting makes the difference: Novel evidence on inflation stabilization

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  • Bleich, Dirk
  • Fendel, Ralf
  • Rülke, Jan-Christoph

Abstract

Though Svensson (1997, 2003) provides theoretical evidence that the introduction of inflation targeting is consistent with an inflation stabilizing monetary policy, empirical evidence that the introduction of inflation targeting actually changes central bank’s behavior is still missing. This paper aims to close this gap and estimates forward-looking monetary policy rules for 20 inflation targeting countries. To this end, we use a data set which is available to the central bank in real-time, published on a frequently basis, comparable among all countries, and which includes the periods before and after the introduction of inflation targeting. We find that the introduction of inflation targeting significantly shifts the central bank’s reaction function toward inflation stabilizing. We also provide evidence of time-varying effects and find that central banks stabilize inflation once inflation targeting is introduced. We take our results as strong evidence that the introduction of inflation targeting makes the difference for monetary policy strategies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 31 (2012)
Issue (Month): 5 ()
Pages: 1092-1105

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Handle: RePEc:eee:jimfin:v:31:y:2012:i:5:p:1092-1105

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Monetary policy; Taylor rule; Inflation targeting;

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References

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Citations

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Cited by:
  1. Pierdzioch, Christian & Rülke, Jan-Christoph, 2013. "Do inflation targets anchor inflation expectations?," Economic Modelling, Elsevier, vol. 35(C), pages 214-223.
  2. Dirk Bleich & Ralf Fendel & Jan-Christoph Rülke, 2013. "Monetary Policy and Stock Market Volatility," Economics Bulletin, AccessEcon, vol. 33(3), pages 1669-1680.
  3. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.

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