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Does Inflation Targeting Make a Difference?

In: Inflation Targeting: Desing, Performance, Challenges

  • Vittorio Corbo

    (Centro de Estudios Públicos)

  • Óscar Landerretche

    (Universidad de Chile)

  • Klaus Schmidt-Hebbel

    (Pontificia Universidad Católica de Chile)

Inflation targeters (ITers) have been very successful in meeting their inflation targets (ITs). Industrial output sacrifice during inflation stabilization and industrial output volatility has frequently been lowered after IT adoption. ITers have consistently reduced inflation forecast errors after IT adoption. The influence of price and output shocks on the behavior of inflation and output gaps has changed much more strongly among ITers than in non-targeting industrial countries in the course of the 1990s. IT has played a role in strengthening the effect of forward-looking expectations on inflation, hence weakening the weight of past inflation inertia. Central bankers’ aversion to inflation is on average not different among ITers in comparison to non-inflation targeters (NITers) but has risen in emerging-country ITers. ITers have gradually reaped a credibility gain, allowing them to achieve their targets with smaller changes in interest rates in the late 1990s than those required in the early 1990s. Chile’s decade-long IT experience toward low stationary inflation shows that gradual phasing in of IT helped in reducing inflation expectations and inflation gradually, and resulted in lower output sacrifice that under a counterfactual more agressive strategy.

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This chapter was published in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Inflation Targeting: Desing, Performance, Challenges, , chapter 5, pages 221-270, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v05c05pp221-270.
Handle: RePEc:chb:bcchsb:v05c05pp221-270
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