Does Inflation Targeting Matter ? An Experimental Investigation
AbstractWe use laboratory experiments with human subjects to test the relevance of di-fferent inflation targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We -find that if the central bank only cares about inflation stabilization, announcing the inflation target does not make a difference in terms of macroeconomic performances compared to a standard active monetary policy. However, if the central bank also cares about the stabilization of the economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap although their average levels are not aff-ected. This finding is consistent with those of the theoretical literature and provides a rationale for the adoption of a flexible inflation targeting regime.
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Date of creation: 28 Oct 2013
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Inflation targeting; inflation expectations; monetary policy; New Keynesian model; laboratory experiments;
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-09 (All new papers)
- NEP-CBA-2013-11-09 (Central Banking)
- NEP-EXP-2013-11-09 (Experimental Economics)
- NEP-MAC-2013-11-09 (Macroeconomics)
- NEP-MON-2013-11-09 (Monetary Economics)
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