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Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK

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Since 1990, a growing number of countries have adopted inflation targeting (IT) around the world. Empirical evidence on its advantages has been mixed so far, and most assessments have been based on a control group methodology. In this paper, using a MSVAR technique, we assess the adoption of IT in three industrialised countries over time; in addition, we compare their outcomes with a non-IT country, the US. Results are manifold. First, an inflation targeting regime exists, although it does not constitute a change in monetary policy reaction. Second, this conclusion is robust on a subsample excluding the periods of high inflation and early sharp disinflation. Third, the sacrifice ratio of higher output volatility generally attributed to inflation stabilisation policies is not sensitive to the adoption of inflation targeting. Fourth, this framework is shown to be conducive to higher monetary policy leeway.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2008-25.

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Date of creation: 2008
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Handle: RePEc:fce:doctra:0825

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Keywords: Inflation targeting; MSVAR; Counterfactuals.;

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Cited by:
  1. Marjan Petreski, 2011. "A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3, pages 57-75.

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