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Does inflation targeting matter for output and inflation volatility?

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  • Luca Gambetti
  • Evi Pappa

Abstract

We address this question by examining the conditional dynamics of inflation and output growth in response to markup shocks for 14 industrialized countries. Markup shocks create a trade-off between output gap and inflation stabilization purposes, and the theory predicts that conditional on such shocks output growth should be more volatile than inflation in inflation targeting countries. Data suggest no differences between targeting and non-targeting countries in the post 1990s. Moreover, we document a similar increase in the conditional relative variability of output growth after the adoption of inflation targeting for both groups of countries. We argue that changes in the conduct of monetary policy can explain this pattern.

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File URL: http://research.barcelonagse.eu/tmp/working_papers/410.pdf
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Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 410.

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Date of creation: Apr 2009
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Handle: RePEc:bge:wpaper:410

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Related research

Keywords: conditional moments; inflation targeting; markup shocks; new policy trade-off; policy ratio; SVAR; trade-off ratio;

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  1. Oscar Landerretche & Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Does Inflation Targeting Make a Difference," Working Papers Central Bank of Chile 106, Central Bank of Chile.
  2. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274 Central Bank of Chile.
  3. Fabio Canova & Luca Gambetti & Evi Pappa, 2006. "The structural dynamics of output growth and inflation: some international evidence," Economics Working Papers 971, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2006.
  4. Verónica Cohen Sabbán & Martín Gonzalez Rozada & Andrew Powell, 2003. "A New Test for the Success of Inflation Targeting," Business School Working Papers inflationtargeting, Universidad Torcuato Di Tella.
  5. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
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