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Does inflation targeting matter? A reassessment

  • Luke Byrne Willard

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.

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File URL: http://hdl.handle.net/10.1080/00036846.2011.564136
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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 44 (2012)
Issue (Month): 17 (June)
Pages: 2231-2244

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Handle: RePEc:taf:applec:44:y:2012:i:17:p:2231-2244
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  1. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
  2. Marianne Bertrand & Esther Duflo & Sendhil Mullainathan, 2002. "How Much Should We Trust Differences-in-Differences Estimates?," NBER Working Papers 8841, National Bureau of Economic Research, Inc.
  3. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  4. Heckman, James & Navarro-Lozano, Salvador, 2003. "Using matching, instrumental variables and control functions to estimate economic choice models," Working Paper Series 2003:4, IFAU - Institute for Evaluation of Labour Market and Education Policy.
  5. Niamh Sheridan & Laurence M. Ball, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund.
  6. Vega, Marco & Winkelried, Diego, 2004. "Inflation Targeting and Inflation Behavior: A Successful Story?," MPRA Paper 838, University Library of Munich, Germany.
  7. 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.
  8. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  9. Boschen, John F. & Weise, Charles L., 2004. "Does the dynamic time consistency model of inflation explain cross-country differences in inflations dynamics?," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 735-759, September.
  10. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346, December.
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