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Inflation Targeting and Inflation Behavior: A Successful Story?

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Author Info
Marco Vega (Central Bank of Peru & London School of Economics)
Diego Winkelried (Cambridge University)

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Abstract

This paper estimates the effects of inflation targeting (IT) adoption over inflation dynamics using a wide control group. We contribute to the current IT evaluation literature by considering the adoption of IT by a country as a treatment, just as in the program evaluation literature. Hence, we perform propensity score matching to determine suitable counterfactuals to the actual inflation targeters. With this approach we find that IT has helped in reducing the level and volatility of inflation in the countries that adopted it. This result is robust to alternative definitions of treatment and control groups. We also find that the e ect of IT in the persistence of inflation is rather weak and not as categorical as the one associated with the mean and volatility of inflation.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0502026.

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Length: 18 pages
Date of creation: 16 Feb 2005
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Handle: RePEc:wpa:wuwpma:0502026

Note: Type of Document - pdf; pages: 18
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Web page: http://129.3.20.41

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Related research
Keywords: Inflation Targeting matching methods

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Find related papers by JEL classification:
E - Macroeconomics and Monetary Economics

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February. [Downloadable!] (restricted)
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  2. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. James Heckman & Hidehiko Ichimura & Jeffrey Smith & Petra Todd, 1998. "Characterizing Selection Bias Using Experimental Data," Econometrica, Econometric Society, vol. 66(5), pages 1017-1098, September.
    Other versions:
  4. Manfred J.M. Neumann & Jrgen von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148. [Downloadable!]
  5. Oscar Landerretche & Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Does Inflation Targeting Make a Difference," Working Papers Central Bank of Chile 106, Central Bank of Chile. [Downloadable!]
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  6. Rajeev H. Dehejia & Sadek Wahba, 2002. "Propensity Score-Matching Methods For Nonexperimental Causal Studies," The Review of Economics and Statistics, MIT Press, vol. 84(1), pages 151-161, February. [Downloadable!] (restricted)
    Other versions:
  7. Jeffrey Smith & Petra Todd, 2003. "Does Matching Overcome Lalonde's Critique of Nonexperimental Estimators?," University of Western Ontario, CIBC Human Capital and Productivity Project Working Papers 20035, University of Western Ontario, CIBC Human Capital and Productivity Project. [Downloadable!]
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  8. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 117-144. [Downloadable!]
  9. 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. [Downloadable!] (restricted)
  10. Emery, Kenneth M., 1994. "Inflation persistence and Fisher effects: Evidence of a regime change," Journal of Economics and Business, Elsevier, vol. 46(3), pages 141-152, August. [Downloadable!] (restricted)
  11. repec:rus:hseeco:181565 is not listed on IDEAS
  12. Pivetta, Frederic & Reis, Ricardo, 2007. "The persistence of inflation in the United States," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1326-1358, April. [Downloadable!] (restricted)
  13. Andrew T. Levin & Jeremy M. Piger, 2004. "Is inflation persistence intrinsic in industrial economies?," Working Paper Series 334, European Central Bank. [Downloadable!]
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  14. 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. [Downloadable!]
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  15. Heckman, James J & Ichimura, Hidehiko & Todd, Petra, 1998. "Matching as an Econometric Evaluation Estimator," Review of Economic Studies, Blackwell Publishing, vol. 65(2), pages 261-94, April. [Downloadable!] (restricted)
  16. Heckman, James J & Ichimura, Hidehiko & Todd, Petra E, 1997. "Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme," Review of Economic Studies, Blackwell Publishing, vol. 64(4), pages 605-54, October. [Downloadable!] (restricted)
  17. Carlos Robalo Marques, 2004. "Inflation persistence - facts or artefacts?," Working Paper Series 371, European Central Bank. [Downloadable!]
  18. Svensson, Lars E.O., 1997. "Inflation Targeting: Some Extensions," Seminar Papers 625, Stockholm University, Institute for International Economic Studies. [Downloadable!]
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  19. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80. [Downloadable!]
  20. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 1-48, February. [Downloadable!] (restricted)
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  21. Andrews, Donald W K & Chen, Hong-Yuan, 1994. "Approximately Median-Unbiased Estimation of Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(2), pages 187-204, April.
  22. Jon Faust & Dale W. Henderson, 2004. "Is inflation targeting best-practice monetary policy?," International Finance Discussion Papers 807, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob de Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," DNB Working Papers 170, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  2. Christopher W. Crowe, 2007. "Testing the Transparency Benefits of Inflation Targeting: Evidence from Private Sector Forecasts," IMF Working Papers 06/289, International Monetary Fund. [Downloadable!]
  3. Ian Babetskii & Fabrizio Coricelli & Roman Horváth, 2007. "Measuring and Explaining Inflation Persistence: Disaggregate Evidence on the Czech Republic," Working Papers IES 2007/22, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Aug 2007. [Downloadable!]
    Other versions:
  4. Paul Castillo & Alberto Humala & Vicente Tuesta, 2007. "Monetary Policy, Regime Shifts, and Inflation Uncertainty in Peru (1949-2006)," Working Papers 2007-005, Banco Central de Reserva del Perú. [Downloadable!]
  5. Mihov, Ilian & Rose, Andrew K, 2007. "Is Old Money Better than New? Duration and Monetary Regimes," CEPR Discussion Papers 6529, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Jorge Lorca, 2005. "Quantifying the Causal Effect of Inflation Targets," Working Papers Central Bank of Chile 337, Central Bank of Chile. [Downloadable!]
  7. Philip Arestis & Alexander Mihailov, 2007. "Flexible Rules cum Constrained Discretion: A New Consensus in Monetary Policy," Economics & Management Discussion Papers em-dp2007-53, School of Business, Reading University. [Downloadable!]
    Other versions:
  8. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2006. "Monetary Policy Under Inflation Targeting: An Introduction," Working Papers Central Bank of Chile 396, Central Bank of Chile. [Downloadable!]
    Other versions:
  9. Michael J. Dueker & Andreas M. Fischer, 2006. "Do inflation targeters outperform non-targeters?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 431-450. [Downloadable!]
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