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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. Ruge-Murcia, F.J., 1998. "Uncovering Financial Markets Beliefs About Inflation Targets," Cahiers de recherche 9803, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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  3. Lundbergh, Stefan & Terasvirta, Timo, 2006. "A time series model for an exchange rate in a target zone with applications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 579-609.
  4. 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.
  5. Svensson, Lars E O, 1995. "The Swedish Experience of an Inflation Target," CEPR Discussion Papers 1103, C.E.P.R. Discussion Papers.
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  14. 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.).
  15. 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.
  16. Catherine S. Forbes & Paul Kofman, 2000. "Bayesian Target Zones," Econometric Society World Congress 2000 Contributed Papers 0575, Econometric Society.
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  19. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/00, Monash University, Department of Econometrics and Business Statistics.
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