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

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Author Info
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)

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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://www.unlv.edu/projects/RePEc/pdf/0920.pdf
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Publisher 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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Related research
Keywords: inflation targeting; time-varying treatment effects; short-run costs; long-run irrelevance;

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Find related papers by JEL classification:
C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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