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Inflation-target design: changing inflation performance and persistence in industrial countries

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  • Pierre L. Siklos

Abstract

This paper explores the behavior of inflation in countries that formally target inflation - relative to countries with historically good inflation records - but, which do not target the rate of change in the consumer price index (CPI). Pierre L. Siklos examines the design of inflation targets and the circumstances under which they were introduced. The author also asks, via some simple econometric tests, whether the introduction of targets had any statistically discernible impact on inflation persistence. Additionally, Siklos questions whether inflation persistence changed in the select countries that have no formal inflation targets. Finally, the author assesses, via a discussion of the behavior of private sector inflation forecasts, the credibility of inflation targets. Descriptive and econometric evidence suggest that the mere adoption of an inflation target is insufficient in delivering a consistently better inflation performance; nor does it significantly affect inflationary expectations. It remains to be seen whether inflation targeting can withstand pressures stemming from sustained breaches of targets, should inflation policies in the major industrialized countries begin to diverge. After all, the current disinflation, as this study has shown, is an international phenomenon.

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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (1999)
Issue (Month): Mar ()
Pages: 46-58

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Handle: RePEc:fip:fedlrv:y:1999:i:mar:p:46-58:n:2

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Keywords: Inflation (Finance) ; Economic policy;

References

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  1. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers, Stockholm University, Institute for International Economic Studies 615, Stockholm University, Institute for International Economic Studies.
  2. Ben S. Bernanke & Michael Woodford, 1997. "Inflation Forecasts and Monetary Policy," NBER Working Papers 6157, National Bureau of Economic Research, Inc.
  3. Burdekin, R.C.K. & Siklos, P.L., 1997. "Exchange Rate Regimes and Shfts in Inflation Persistence: Does Nothing Else Matter?," Working Papers, Wilfrid Laurier University, Department of Economics 97-2, Wilfrid Laurier University, Department of Economics.
  4. Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108 National Bureau of Economic Research, Inc.
  5. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1254-75, December.
  6. Johnson, David R & Siklos, Pierre L, 1996. "Political and Economic Determinants of Interest Rate Behavior: Are Central Banks Different?," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 34(4), pages 708-29, October.
  7. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  8. Hatanaka, Michio, 1996. "Time-Series-Based Econometrics: Unit Roots and Co-integrations," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780198773535, October.
  9. Guy Debelle, 1996. "The Ends of Three Small Inflations: Australia, New Zealand and Canada," Canadian Public Policy, University of Toronto Press, vol. 22(1), pages 56-78, March.
  10. Charles Freedman & Tiff Macklem, 1998. "A Comment on "The Great Canadian Slump"," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 31(3), pages 646-665, August.
  11. Patricia S. Pollard, 1995. "EMU: will it fly?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Jul, pages 3-16.
  12. Pierre Fortin, 1996. "The Great Canadian Slump," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 29(4), pages 761-87, November.
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