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Does Inflation Targeting Matter? An Experimental Investigation

Author

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  • Cornand, Camille
  • M'baye, Cheick Kader

Abstract

We use laboratory experiments with human subjects to test the relevance of different inflation-targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank cares only about inflation stabilization, announcing the inflation target does not make a difference in terms of macroeconomic performance compared with a standard active monetary policy. However, if the central bank also cares about the stabilization of economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap, although their average levels are not affected. This finding is consistent with the theoretical literature and provides a rationale for the adoption of a flexible inflation-targeting regime.

Suggested Citation

  • Cornand, Camille & M'baye, Cheick Kader, 2018. "Does Inflation Targeting Matter? An Experimental Investigation," Macroeconomic Dynamics, Cambridge University Press, vol. 22(2), pages 362-401, March.
    • Handle: RePEc:cup:macdyn:v:22:y:2018:i:02:p:362-401_00
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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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