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Expectations Anchoring in Inflation Targeting Regimes

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  • Oleg Korenok

    ()
    (Department of Economics, VCU School of Business)

  • Stanislav Radchenko

    ()
    (Department of Economics, University of North Carolina at Charlotte)

Abstract

Central banks adopt an inflation targeting policy with a goal to anchor inflation expectations. We argue that the expectations anchoring test developed in the context of the Krugman (1991) exchange rate targeting model is well-suited for inflation targeting applications. The test quantifies nonlinearity between realized and expected inflation for very high and very low inflation levels. It does not require comparison with the control group of non-targeting countries, avoiding critique of the benchmark approach. We test inflation targeting in Australia, Canada, New Zealand, Sweden, the United Kingdom and find weak support for expectations anchoring.

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Bibliographic Info

Paper provided by VCU School of Business, Department of Economics in its series Working Papers with number 0503.

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Length: 20 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:vcu:wpaper:0503

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Keywords: monetary policy; inflation; exchange rate; target zone model; expectations anchoring;

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References

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  1. Robert J. Tetlow, 2000. "Inflation targeting and target instability," Finance and Economics Discussion Series 2000-01, Board of Governors of the Federal Reserve System (U.S.).
  2. Paul Krugman & Marcus Miller, 1992. "Exchange Rate Targets and Currency Bands," NBER Books, National Bureau of Economic Research, Inc, number krug92-1.
  3. RUGE-MURCIA, Francisco J., 1998. "Uncovering Financial Markets Beliefs About Inflation Targets," Cahiers de recherche 9803, Universite de Montreal, Departement de sciences economiques.
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  8. Paul R. Krugman, 1988. "Target Zones and Exchange Rate Dynamics," NBER Working Papers 2481, National Bureau of Economic Research, Inc.
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  11. 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.
  12. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
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  14. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
  15. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Econometric Society World Congress 2000 Contributed Papers 0575, Econometric Society.
  16. Robert Amano & Richard Black & Marcel Kasumovich, 1997. "A Band-Aid Solution to Inflation Targeting," Working Papers 97-11, Bank of Canada.
  17. Lars E.O. Svensson, 2003. "Monetary policy and learning," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 11-16.
  18. Li, Kai, 1999. "Exchange Rate Target Zone Models: A Bayesian Evaluation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 461-90, Sept.-Oct.
  19. Pesaran, M Hashem & Ruge-Murcia, Francisco J, 1999. "Analysis of Exchange-Rate Target Zones Using a Limited-Dependent Rational-Expectations Model with Jumps," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 50-66, January.
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