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Does inflation targeting matter? A reassessment

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  • Luke Byrne Willard

Abstract

A number of countries have adopted the policy of inflation targeting and a substantial literature exists on the virtues of inflation targeting in reducing inflation (Bernanke et�al ., 1999). However, results in the existing empirical literature conflict. This article uses a number of identification approaches (instrumental variables, assumptions about heteroscedasticity, panel-fixed effects and a potential natural experiment) to estimate the effect of inflation targeting on inflation for a sample of Organization for Economic Co-operation and Development (OECD) countries. Generally, it finds that the effect is small and insignificant. It also finds little evidence that inflation variability, inflation uncertainty, inflation volatility or inflation expectations fall with targeting suggesting that inflation targeting does not affect a number of variables likely to be of interest to policy makers.

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File URL: http://hdl.handle.net/10.1080/00036846.2011.564136
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 44 (2012)
Issue (Month): 17 (June)
Pages: 2231-2244

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Handle: RePEc:taf:applec:44:y:2012:i:17:p:2231-2244

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  1. Laurence Ball & Niamh Sheridan, 2004. "Does inflation targeting matter?," DNB Staff Reports (discontinued) 118, Netherlands Central Bank.
  2. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
  3. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, July.
  4. Heckman, James & Navarro-Lozano, Salvador, 2003. "Using matching, instrumental variables and control functions to estimate economic choice models," Working Paper Series 2003:4, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Marco Vega & Diego Winkelried, 2005. "Inflation Targeting and Inflation Behavior: A Successful Story?," Macroeconomics 0502026, EconWPA.
  6. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  7. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  8. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  9. Boschen, John F. & Weise, Charles L., 2004. "Does the dynamic time consistency model of inflation explain cross-country differences in inflations dynamics?," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 735-759, September.
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Citations

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Cited by:
  1. Carrasco, Carlos A., 2013. "El Nuevo Consenso Macroeconómico y la mediocridad del crecimiento económico en México
    [New Consensus Macroeconomics and the mediocrity of economic growth in Mexico]
    ," MPRA Paper 53391, University Library of Munich, Germany.
  2. 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, vol. 1(4), pages 352-372.
  3. Helder Ferreira de Mendonca, 2007. "Empirical evidence from fourteen countries with explicit inflation targeting," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 573-576.
  4. Andrew Hallett & Jan Libich, 2012. "Explicit inflation targets and central bank independence: friends or foes?," Economic Change and Restructuring, Springer, vol. 45(4), pages 271-297, November.
  5. Ali, Syed Zahid & Anwar, Sajid, 2013. "Inflation and interest rates in the presence of a cost channel, wealth effect and agent heterogeneity," Economic Modelling, Elsevier, vol. 31(C), pages 286-296.
  6. Libich, Jan, 2008. "An explicit inflation target as a commitment device," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 43-68, March.
  7. Bystedt, Brianne & Brito, Ricardo D., 2008. "Inflation targeting in emerging economies: Panel evidence," Insper Working Papers wpe_125, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Ftiti, Zied & Hichri, Walid, 2014. "The price stability under inflation targeting regime: An analysis with a new intermediate approach," Economic Modelling, Elsevier, vol. 38(C), pages 23-32.
  9. Moretti, Laura, 2014. "Inflation targeting and product market deregulation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 372-386.
  10. Carlos A. Carrasco & Jesus Ferreiro, 2013. "Inflation targeting in Mexico," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 35(3), pages 341-372, April.
  11. Alexandra Peter & Sarwat Jahan & Edward R. Gemayel, 2011. "What Can Low-Income Countries Expect From Adopting Inflation Targeting?," IMF Working Papers 11/276, International Monetary Fund.
  12. Alan S. Blinder, 2006. "Monetary Policy Today: Sixteen Questions and about Twelve Answers," Working Papers 73, Princeton University, Department of Economics, Center for Economic Policy Studies..

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