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Uncovering financial markets' beliefs about inflation targets

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  • Francisco J. Ruge-Murcia

    (Departemente de sciences economiques, Universite de Montreal, CP 6128, succursale Centre-ville, Montreal (Quebec), H3C 3J7, Canada)

Abstract

This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long-term interest rates and inflation when the latter is subject to a targeting policy by the central bank. In an empirical application to the Canadian inflation target zone, results indicate that financial markets perceive the band to be of approximately the same width as announced but asymmetrically distributed around the official target. This finding suggests that, in practice, the monetary authority might attach different weights to positive and negative inflation deviations from the target. Copyright © 2000 John Wiley & Sons, Ltd.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 15 (2000)
Issue (Month): 5 ()
Pages: 483-512

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Handle: RePEc:jae:japmet:v:15:y:2000:i:5:p:483-512

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Citations

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Cited by:
  1. Ruge-Murcia, F.J., 2001. "A Prudent Central Banker," Cahiers de recherche 2001-07, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
  2. repec:ebl:ecbull:v:7:y:2007:i:13:p:1-7 is not listed on IDEAS
  3. Francisco J. Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," Banco de Espa�a Working Papers 0106, Banco de Espa�a.
  4. Capistrán, Carlos, 2008. "Bias in Federal Reserve inflation forecasts: Is the Federal Reserve irrational or just cautious?," Journal of Monetary Economics, Elsevier, vol. 55(8), pages 1415-1427, November.
  5. Oleg Korenok & Stanislav Radchenko, 2005. "Expectations Anchoring in Inflation Targeting Regimes," Working Papers 0503, VCU School of Business, Department of Economics.
  6. St-Amant, Pierre & Tessier, David, 1998. "Résultats empiriques multi-pays relatifs à l'impact des cibles d'inflation sur la crédibilité de la politique monétaire," Working Papers 98-23, Bank of Canada.
  7. Diana N. Weymark, 2001. "Inflation Targeting, Announcements, and Imperfect Credibility," Vanderbilt University Department of Economics Working Papers 0124, Vanderbilt University Department of Economics, revised Apr 2002.
  8. RUGE-MURCIA, Francisco J., 2002. "Some Implications of the Zero Lower Bound on Interest Rates for the Term Structure and Monetary Policy," Cahiers de recherche 2002-06, Universite de Montreal, Departement de sciences economiques.
  9. Perrier, Patrick, 1998. "Un examen de la crédibilité de la politique monétaire au Canada," Working Papers 98-12, Bank of Canada.

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