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Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries


  • Thomas Y. Wu


Despite of its popularity, empirical studies have failed to find evidence of the causal effect of a country's adoption of the Inflation Targeting regime on that country's inflation rate decline. This paper applies the multi-period differences-in-differences estimation to the quarterly CPI inflation rates from the first quarter of 1985 until the third quarter of 2002 to the 22 OECD industrial countries and finds two basic sets of results. The first set of evidences is that countries that have officially adopted Inflation Targeting experience a decrease in their average inflation rates that is not only due to a reversion to mean process. The second set of results is that (1) there seems to be no evidence that Inflation Targeting countries experienced a significant increase in the level of their real interest rates after they adopted the new regime and that (2) even after controlling for the level of real interest rates there is still a causal effect from the adoption of Inflation Targeting to the reduction in inflation rates. In other words, the empirical evidence rejects the idea that the better performance in the inflation rates of the Inflation Targeting countries is only due to a more "aggressive" monetary policy.

Suggested Citation

  • Thomas Y. Wu, 2004. "Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries," Working Papers Series 83, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:83

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    References listed on IDEAS

    1. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters,in: The Inflation-Targeting Debate, pages 249-282 National Bureau of Economic Research, Inc.
    2. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-368, October.
    3. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    4. N. Gregory Mankiw, 2001. "U. S. Monetary Policy During the 1990s," Harvard Institute of Economic Research Working Papers 1927, Harvard - Institute of Economic Research.
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    Cited by:

    1. Ftiti, Zied & Hichri, Walid, 2014. "The price stability under inflation targeting regime: An analysis with a new intermediate approach," Economic Modelling, Elsevier, vol. 38(C), pages 23-32.
    2. Maria da Glória D. S. Araújo & Mirta Bugarin & Marcelo Kfoury Muinhos & Jose Ricardo C. Silva, 2006. "The Effect of Adverse Supply Shocks on Monetary Policy and Output," Working Papers Series 103, Central Bank of Brazil, Research Department.
    3. Scott Roger & Mark R. Stone, 2005. "On Target? the International Experience with Achieving Inflation Targets," IMF Working Papers 05/163, International Monetary Fund.
    4. Marcelo Y. Takami & Benjamin M. Tabak, 2007. "Evaluation of Default Risk for The Brazilian Banking Sector," Working Papers Series 135, Central Bank of Brazil, Research Department.
    5. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 214-230.
    6. Broto, Carmen, 2011. "Inflation targeting in Latin America: Empirical analysis using GARCH models," Economic Modelling, Elsevier, vol. 28(3), pages 1424-1434, May.
    7. Yifan Hu, 2006. "The choice of inflation targeting—an empirical investigation," International Economics and Economic Policy, Springer, vol. 3(1), pages 27-42, April.
    8. Mauricio S. Bugarin & Fabia A. de Carvalho, 2005. "Comment on ‘Market discipline and monetary policy’ by Carl Walsh," Oxford Economic Papers, Oxford University Press, vol. 57(4), pages 732-739, October.
    9. Ardakani, Omid & Kishor, Kundan & Song, Suyong, 2015. "On the Effectiveness of Inflation Targeting: Evidence from a Semiparametric Approach," MPRA Paper 75091, University Library of Munich, Germany.
    10. André Soares Loureiro & Fernando de Holanda Barbosa, 2004. "Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002," Working Papers Series 85, Central Bank of Brazil, Research Department.
    11. Araújo, Aloísio Pessoa de & Leon, Márcia Saraiva, 2003. "Speculative attacks on debts and optimum currency area: a welfare analysis," FGV/EPGE Economics Working Papers (Ensaios Economicos da EPGE) 514, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
    12. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
    13. de Mendonça, Helder Ferreira & de Guimarães e Souza, Gustavo José, 2012. "Is inflation targeting a good remedy to control inflation?," Journal of Development Economics, Elsevier, vol. 98(2), pages 178-191.
    14. Libich, Jan, 2008. "An explicit inflation target as a commitment device," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 43-68, March.
    15. Moretti, Laura, 2014. "Inflation targeting and product market deregulation," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 372-386.
    16. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
    17. Ana Carla A. Costa & João M. P. de Mello, 2006. "Judicial Risk and Credit Market Performance: Micro Evidence from Brazil Payroll Loans," Working Papers Series 102, Central Bank of Brazil, Research Department.
    18. Brito, Ricardo D., 2009. "Does inflation targeting really matter? Another look at the OECD economies," Insper Working Papers wpe_193, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    19. Angelo Marsiglia Fasolo, 2006. "Interdependence and Contagion: an Analysis of Information Transmission in Latin America's Stock Markets," Working Papers Series 112, Central Bank of Brazil, Research Department.
    20. Mirta Noemí Sataka Bugarin & Roberto de Goes Ellery Jr. & Victor Gomes Silva & Marcelo Kfoury Muinhos, 2005. "Steady State Analysis of an Open Economy General Equilibrium Model for Brazil," Working Papers Series 92, Central Bank of Brazil, Research Department.
    21. Marcelo Kfoury Muinhos & Márcio I. Nakane, 2006. "Comparing equilibrium real interest rates: different approaches to measure Brazilian rates," Working Papers Series 101, Central Bank of Brazil, Research Department.

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