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Does inflation targeting matter? A reassessment

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  • Luke Byrne Willard

Abstract

A number of countries have adopted the policy of inflation targeting and a substantial literature exists on the virtues of inflation targeting in reducing inflation (Bernanke et al ., 1999). However, results in the existing empirical literature conflict. This article uses a number of identification approaches (instrumental variables, assumptions about heteroscedasticity, panel-fixed effects and a potential natural experiment) to estimate the effect of inflation targeting on inflation for a sample of Organization for Economic Co-operation and Development (OECD) countries. Generally, it finds that the effect is small and insignificant. It also finds little evidence that inflation variability, inflation uncertainty, inflation volatility or inflation expectations fall with targeting suggesting that inflation targeting does not affect a number of variables likely to be of interest to policy makers.

Suggested Citation

  • Luke Byrne Willard, 2012. "Does inflation targeting matter? A reassessment," Applied Economics, Taylor & Francis Journals, vol. 44(17), pages 2231-2244, June.
  • Handle: RePEc:taf:applec:44:y:2012:i:17:p:2231-2244 DOI: 10.1080/00036846.2011.564136
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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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