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Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance

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  • WenShwo Fang

    ()
    (Department of Economics, Feng Chia University)

  • Stephen M. Miller

    ()
    (Department of Economics, University of Nevada, Las Vegas)

  • ChunShen Lee

    ()
    (Department of Economics, Feng Chia University)

Abstract

Recent studies evaluate the effectiveness of inflation targeting through the average treatment effect and generally conclude the window-dressing view of the monetary policy for industrial countries. This paper argues that the evidence of irrelevance emerges because of a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time. Targeters achieve lower inflation immediately following the adoption of the policy as well as temporarily slower output growth and higher inflation and output growth variability. But these short-run effects will eventually disappear in the long run. This paper finds substantial empirical evidence for the existence of such intertemporal tradeoffs for eight industrial inflation-targeting countries. That is, targeting inflation significantly reduces inflation at the costs of a lower output growth and higher inflation and growth variability in the short-run, but no substantial effects in the medium to the long-run.

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File URL: http://web.unlv.edu/projects/RePEc/pdf/0920.pdf
File Function: First version, 2008
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Bibliographic Info

Paper provided by University of Nevada, Las Vegas , Department of Economics in its series Working Papers with number 0920.

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Length: 36 pages
Date of creation: Jun 2009
Date of revision:
Handle: RePEc:nlv:wpaper:0920

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Keywords: inflation targeting; time-varying treatment effects; short-run costs; long-run irrelevance;

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Cited by:
  1. Rangan Gupta, 2011. "Growth-Effects of Inflation Targeting: The Role of Financial Sector Development," Annals of Economics and Finance, Society for AEF, vol. 12(1), pages 65-87, May.
  2. Svensson, Lars E.O., 2010. "Inflation Targeting," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 22, pages 1237-1302 Elsevier.

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