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Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK

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  • Paul Hubert
  • Jérôme Creel

    (OFCE)

Abstract

Since 1990, a growing number of countries have adopted inflation targeting (IT) around the world. Empirical evidence on its advantages has been mixed so far, and most assessments have been based on a control group methodology. In this paper, using a MSVAR technique, we assess the adoption of IT in three industrialised countries over time; in addition, we compare their outcomes with a non-IT country, the US. Results are manifold. First, an inflation targeting regime exists, although it does not constitute a change in monetary policy reaction. Second, this conclusion is robust on a subsample excluding the periods of high inflation and early sharp disinflation. Third, the sacrifice ratio of higher output volatility generally attributed to inflation stabilisation policies is not sensitive to the adoption of inflation targeting. Fourth, this framework is shown to be conducive to higher monetary policy leeway.

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Bibliographic Info

Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/9543.

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Date of creation: 18 Sep 2008
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Publication status: Published in 57ème Congrès de l’AFSE, Paris, 18-19 septembre 2008 , pp.
Handle: RePEc:spo:wpmain:info:hdl:2441/9543

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Keywords: Inflation targeting; MSVAR; Counterfactuals;

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Cited by:
  1. Marjan Petreski, 2011. "A Markov Switch to Inflation Targeting in Emerging Market Peggers with a Focus on the Czech Republic, Poland and Hungary," Focus on European Economic Integration, Oesterreichische Nationalbank (Austrian Central Bank), issue 3.

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