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Central Bank Performance under Inflation Targeting

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  • Marc-André Gosselin
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    Abstract

    The inflation targeting (IT) regime is 17 years old. With practice of IT now in more than 21 countries, there is enough evidence gathered to take stock of the IT experience. In this paper, we analyze the inflation record of IT central banks. We extend the work of Albagli and Schmidt-Hebbel (2004) by looking at a broad range of factors that can influence inflation target deviations and by identifying the empirical determinants of successful monetary policy under IT. We find that part of the cross-country and time variation in inflation deviations from targets can be explained by exchange rate movements, fiscal deficits, and differences in financial sector development. With respect to the components of the IT framework, we find that a higher inflation target and a larger inflation control range are associated with more variable inflation (and output) outcomes. Although the literature tends to suggest that greater central bank transparency is desirable, our findings imply that transparency might be associated with less satisfactory inflation performance. Interestingly, central banks using economic models do a better job of stabilizing inflation around the target and output around trend.

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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 07-18.

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    Length: 33 pages
    Date of creation: 2007
    Date of revision:
    Handle: RePEc:bca:bocawp:07-18

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    Keywords: Central bank research; Inflation targets; Monetary policy framework;

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    9. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
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    12. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    13. Tiff Macklem, 2005. "Commentary : central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 475-494.
    14. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    15. 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.
    16. Michael Woodford, 2005. "Central-bank communication and policy effectiveness," Discussion Papers 0506-07, Columbia University, Department of Economics.
    17. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
    18. Jan-Egbert Sturm & Jakob de Haan, 2001. "Inflation in Developing Countries: Does Central Bank Independence Matter?," CESifo Working Paper Series 511, CESifo Group Munich.
    19. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
    20. Don Coletti & Stephen Murchison, 2002. "Models in Policy-Making," Bank of Canada Review, Bank of Canada, vol. 2002(Spring), pages 19-26.
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    22. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
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    Cited by:
    1. de Mendonça, Helder Ferreira & de Guimarães e Souza, Gustavo José, 2012. "Is inflation targeting a good remedy to control inflation?," Journal of Development Economics, Elsevier, vol. 98(2), pages 178-191.

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