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Does Inflation Targeting Affect the Dispersion of Inflation Expectations?

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  • CARLOS CAPISTRÁN
  • MANUEL RAMOS‐FRANCIA

Abstract

In this paper, we examine the effect of having an inflation targeting framework on the dispersion of inflation forecasts from professional forecasters. We use a panel data set of 25 countries—including 14 inflation targeters—with 16 years of monthly information. We find that the dispersion of long‐run inflation expectations is smaller in targeting regimes after controlling for country‐specific effects, time‐specific effects, the level and the variance of inflation, disinflation periods, and global inflation. On average, the full effect is not observed until the third year after implementation of inflation targeting. When we differentiate between developed and developing countries, the dispersion of inflation expectations after inflation targeting is smaller and statistically significant only in developing countries.

Suggested Citation

  • Carlos Capistrán & Manuel Ramos‐Francia, 2010. "Does Inflation Targeting Affect the Dispersion of Inflation Expectations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 113-134, February.
  • Handle: RePEc:wly:jmoncb:v:42:y:2010:i:1:p:113-134
    DOI: 10.1111/j.1538-4616.2009.00280.x
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    Cited by:

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    3. Bems, Rudolfs & Caselli, Francesca & Grigoli, Francesco & Gruss, Bertrand, 2021. "Expectations' anchoring and inflation persistence," Journal of International Economics, Elsevier, vol. 132(C).
    4. Shu Lin & Haichun Ye, 2012. "What to Target? Inflation or Exchange Rate," Southern Economic Journal, John Wiley & Sons, vol. 78(4), pages 1202-1221, April.
    5. Antonia López‐Villavicencio & Marc Pourroy, 2022. "Fed's Policy Changes and Inflation in Emerging Markets: Lessons from the Taper Tantrum," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 54(4), pages 1099-1121, June.
    6. Lena Cleanthous, 2020. "Conceptual note on inflation targeting types and their performance in anchoring inflation expectations," Working Papers 2020-01, Central Bank of Cyprus.
    7. Gayaker, Savas & Ağaslan, Erkan & Alkan, Buket & Çiçek, Serkan, 2021. "The deterioration in credibility, destabilization of exchange rate and the rise in exchange rate pass-through in Turkey," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 571-587.
    8. Gaurav Kumar Singh & Tathagata Bandyopadhyay, 2024. "Determinants of disagreement: Learning from inflation expectations survey of households," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 43(2), pages 326-343, March.
    9. Abdelkader Aguir & Mounir Smida, 2014. "The Effects of Inflation Targeting on Macroeconomics Performance," Post-Print hal-03791288, HAL.
    10. Abdelkader Aguir, 2014. "The Impact of Central Bank Independence on The Performance of Inflation Targeting Regimes : Emerging Economies," Post-Print hal-03825933, HAL.
    11. Toshitaka Sekine & Frank Packer & Shunichi Yoneyama, 2022. "Individual Trend Inflation," IMES Discussion Paper Series 22-E-14, Institute for Monetary and Economic Studies, Bank of Japan.
    12. Abdelkader Aguir, 2015. "Efficiency of monetary policy under inflation targeting," Post-Print hal-03791251, HAL.
    13. Paul Hubert, 2010. "Monetary policy, imperfect information and the expectations channel [Politique monétaire,information imparfaite et canal des anticipations]," SciencePo Working papers Main tel-04095385, HAL.
    14. Sangyong Joo & Daehwan Kim & Jeffrey Nilsen, 2021. "Monetary Policy and Long-Term Interest Rates in Korea: A Decomposition Analysis," Korean Economic Review, Korean Economic Association, vol. 37, pages 327-366.
    15. Lu, You-Xun, 2022. "The stabilizing effect of the zero lower bound: A perspective of interest rate target zones," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 61-67.
    16. Zafar Hayat & Saher Masood, 2022. "Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 1-27.
    17. Suh, Sangwon & Kim, Daehwan, 2021. "Inflation targeting and expectation anchoring: Evidence from developed and emerging market economies," The North American Journal of Economics and Finance, Elsevier, vol. 58(C).
    18. Enrique A. López-Enciso & Hernando Vargas-Herrera & Norberto Rodríguez-Niño, 2016. "La estrategia de inflación objetivo en Colombia. Una visión histórica," Borradores de Economia 952, Banco de la Republica de Colombia.

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