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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.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps83.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 83.

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Date of creation: May 2004
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Handle: RePEc:bcb:wpaper:83
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Niamh Sheridan & Laurence M. Ball, 2003. "Does Inflation Targeting Matter?," IMF Working Papers 03/129, International Monetary Fund.
  2. Alina Carare & Mark R. Stone, 2003. "Inflation Targeting Regimes," IMF Working Papers 03/9, International Monetary Fund.
  3. Vittorio Corbo & Oscar Landerretche & Klaus Schmidt-Hebbel, 2001. "Assessing Inflation Targeting after a Decade of World Experience," Working Papers 51, Oesterreichische Nationalbank (Austrian Central Bank).
  4. N. Gregory Mankiw, 2001. "U.S. Monetary Policy During the 1990s," NBER Working Papers 8471, National Bureau of Economic Research, Inc.
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