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Does Inflation Targeting Matter?

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  • Niamh Sheridan
  • Laurence M. Ball

Abstract

This paper asks whether inflation targeting improves economic performance, as measured by the behavior of inflation, output, and interest rates. We compare 7 OECD countries that adopted inflation targeting in the early 1990s to 13 that did not. After the early 1990s, performance improved along many dimensions for both targeting and nontargeting countries. In some cases, the targeters improved by more. However, these differences are explained by the fact that targeters performed worse than nontargeters before the early 1990s, and there is regression towards the mean. Once one controls for this, there is no evidence that inflation targeting improves performance.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/129.

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Length: 36
Date of creation: 01 Jun 2003
Date of revision:
Handle: RePEc:imf:imfwpa:03/129

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Keywords: Economic conditions; inflation; inflation targeting; monetary policy; average inflation; inflation-targeting; inflation rate; monetary fund; central bank; effects of inflation; relative price; inflation target; monetary economics; effect of inflation; long-term interest rates; low inflation; change in inflation; inflation- targeting; macroeconomic performance; rate of inflation; inflationary impact; price level; annual inflation; inflation dynamics; lower inflation; monetary system; real output; inflation forecasts; monetary policy regimes; long- term interest rates; european monetary system; inflation rates; monetary policies;

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References

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  1. 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.
  2. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
  3. Lars E.O. Svensson, 1995. "The Swedish Experience of an Inflation Target," NBER Working Papers 4985, National Bureau of Economic Research, Inc.
  4. Marc Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting," IMF Occasional Papers 202, International Monetary Fund.
  5. Svensson, Lars E O, 1996. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," CEPR Discussion Papers 1511, C.E.P.R. Discussion Papers.
  6. Kenneth N. Kuttner & Adam S. Posen, 1999. "Does talk matter after all? Inflation targeting and central bank behavior," Staff Reports 88, Federal Reserve Bank of New York.
  7. Layard, Richard & Nickell, Stephen & Jackman, Richard, 1991. "Unemployment: Macroeconomic Performance and the Labour Market," OUP Catalogue, Oxford University Press, number 9780198284345.
  8. Laurence M. Ball, 1997. "Disinflation and the NAIRU," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 167-194 National Bureau of Economic Research, Inc.
  9. Chorng-Huey Wong & Eric V. Clifton & H. L. Leon, 2001. "Inflation Targeting and the Unemployment-Inflation Trade-Off," IMF Working Papers 01/166, International Monetary Fund.
  10. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
  11. Manfred J.M. Neumann & Jrgen von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148.
  12. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
  13. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372 Central Bank of Chile.
  14. 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.
  15. Frederic S. Mishkin, 2002. "Does inflation targeting matter? - commentary," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 149-154.
  16. Frederic S. Mishkin & Adam S. Posen, 1998. "Inflation Targeting: Lessons from Four Countries," NBER Working Papers 6126, National Bureau of Economic Research, Inc.
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