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Empirical Investigations of Inflation Targeting

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  • Yifan Hu

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    (Georgetown University, Department of Economics)

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    Abstract

    A growing number of countries have anchored their monetary policy to an explicit numerical rate or range of inflation since such an inflation targeting framework was first adopted by New Zealand in 1989. This paper empirically investigates issues associated with inflation targeting using a dataset of 66 countries for the 1980-2000 period. The paper focuses on two issues. First, which factors are systematically associated with a country's decision to adopt inflation targeting as its monetary framework? Second, does inflation targeting improve the performance of inflation and output? Does the trade-off between inflation and output variability change under such a framework? The empirical results are informative and encouraging. A number of economic conditions, structure, and institution variables are significantly associated with the choice of inflation targeting. Both descriptive statistics and regression results suggest that inflation targeting does play a beneficial role in improving the performance of inflation and output. This paper explores an evident and positive relationship between inflation and output variability, which is different from the view based on the Taylor Curve. But the author finds limited support for the proposition that the adoption of inflation targeting improves the trade-off between inflation and output variability.

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    Bibliographic Info

    Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP03-6.

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    Date of creation: Jul 2003
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    Handle: RePEc:iie:wpaper:wp03-6

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    References

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    1. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1521-1538, November.
    2. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc.
    3. Niamh Sheridan & Laurence M. Ball, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund.
    4. Amato, Jeffery D. & Gerlach, Stefan, 2001. "Inflation Targeting in Emerging Market and Transition Economies: Lessons After a Decade," CEPR Discussion Papers 3074, C.E.P.R. Discussion Papers.
    5. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    6. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
    7. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
    8. Berger, Helge & de Haan, Jakob & Eijffinger, Sylvester C W, 2000. "Central Bank Independence: An Update of Theory and Evidence," CEPR Discussion Papers 2353, C.E.P.R. Discussion Papers.
    9. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    10. David Romer, 1991. "Openness and Inflation: Theory and Evidence," NBER Working Papers 3936, National Bureau of Economic Research, Inc.
    11. A. Senhadji Semlali & Mohsin S. Khan, 2000. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Working Papers 00/110, International Monetary Fund.
    12. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
    13. Christopher J. Erceg, 2002. "The Choice of an Inflation Target Range in a Small Open Economy," American Economic Review, American Economic Association, vol. 92(2), pages 85-89, May.
    14. Manfred J.M. Neumann & Jrgen von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148.
    15. Adam Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
    16. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," NBER Working Papers 8397, National Bureau of Economic Research, Inc.
    17. Francisco Nadal-De Simone, 2001. "An Investigation of Output Variance Before and During Inflation Targeting," IMF Working Papers 01/215, International Monetary Fund.
    18. Marco Terrones & Luis Catão, 2001. "Fiscal Deficits and Inflation," IMF Working Papers 01/74, International Monetary Fund.
    19. Kenneth N. Kuttner, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," Working Papers 52, Oesterreichische Nationalbank (Austrian Central Bank).
    20. Lane, Philip & Milesi-Ferretti, Gian Maria, . "External Wealth of Nations," Instructional Stata datasets for econometrics extwealth, Boston College Department of Economics.
    21. Fukuda, Shin-ichi & Hoshi, Takeo & Ito, Takatoshi & Rose, Andrew, 2006. "International Finance," Journal of the Japanese and International Economies, Elsevier, vol. 20(4), pages 455-458, December.
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    Cited by:
    1. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
    2. Ravenna, Federico, 2005. "The European Monetary Union as a commitment device for new EU member states," Working Paper Series 0516, European Central Bank.
    3. Nadia Saleem, 2010. "Adopting Inflation Targeting in Pakistan: An Empirical Analysis," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 15(2), pages 51-76, Jul-Dec.
    4. Ibrahim L. AWAD, 2008. "Is Egypt Ready to Apply Inflation Targeting Regime?," Review of Economic and Business Studies, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, issue 2, pages 141-159, November.
    5. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
    6. Markus Hyvonen, 2004. "Inflation Convergence Across Countries," RBA Research Discussion Papers rdp2004-04, Reserve Bank of Australia.
    7. Ibrahim L. Awad, 2009. "Did Egypt Satisfy Prerequisites for an it Regime?," Acta Oeconomica Pragensia, University of Economics, Prague, vol. 2009(6), pages 63-80.

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