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Does inflation targeting matter?

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  • Manfred J. M. Neumann
  • Jurgen Von Hagen

Abstract

This paper studies the inflation and interest rate performances since the late 1970s for six former highinflation countries that adopted inflation targeting (IT) in the early 1990’s. Using Germany, Switzerland and the US for comparison, we look at various aspects of central bank performance in a pre-IT period (1978-92) and a post-IT period (1993-01). The results of all types of evidence considered uniformly lead to the general conclusion that IT has proven a useful strategy for reducing the level and volatility of inflation. However, IT central banks did not outperform the central banks used as reference cases during the second period. We then present an event study of monetary policy comparing inflation and interest rate developments after the 1978 and the 1998 oil price shocks. Here we find that IT central banks realized significantly larger gains in credibility than the central banks in the reference group. . This result corroborates the conclusion that IT is a useful framework for communicating a monetary policy strategy aiming at low inflation rates.
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Suggested Citation

  • Manfred J. M. Neumann & Jurgen Von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148.
    • Handle: RePEc:fip:fedlrv:y:2002:i:jul:p:127-148:n:v.84no.4
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    References listed on IDEAS

    as
    1. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    2. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23, April.
    3. George A. Kahn & Klara Parrish, 1998. "Conducting monetary policy with inflation targets," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
    4. Geraats, Petra M., 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Center for International and Development Economics Research, Working Paper Series qt0hw7h7cp, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
    5. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
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    Keywords

    Inflation (Finance) ; Monetary policy;

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