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An Assessment of Inflation Targeting in a Quantitative Monetary Business Cycle Framework

Author

Listed:
  • Cho , Dooyeon

    (Sungkyunkwan University)

  • Rhee , Dong-Eun

    (Korea Institute for International Economic Policy)

Abstract

This paper examines the effectiveness of inflation targeting to stabilize the real economy of the advanced countries where inflation targeting was adopted in the early 1990s. This paper employs the monetary business cycle accounting methodology recently developed by Šustek (2011) which is an extended version of Chari, Kehoe, and McGrattan (2007) to monetary models in order to quantitatively assess inflation targeting. Our main finding is that the monetary policy wedge, which captures economic fluctuations caused by monetary policy, has significantly declined since the implementation of inflation targeting in the early 1990s. The results suggest that advanced economies such as Australia, Canada, Sweden, and the UK, that adopted inflation targeting in the early 1990s have been successful in stabilizing business cycle fluctuations.

Suggested Citation

  • Cho , Dooyeon & Rhee , Dong-Eun, 2012. "An Assessment of Inflation Targeting in a Quantitative Monetary Business Cycle Framework," Working Papers 12-7, Korea Institute for International Economic Policy.
    • Handle: RePEc:ris:kiepwp:2012_007
    DOI: 10.2139/ssrn.2319676
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    More about this item

    Keywords

    Monetary Business; Cycle Accounting; Inflation Targeting;
    All these keywords.

    JEL classification:

    • E13 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Neoclassical
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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