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Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations

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  • Ehrmann, Michael

Abstract

Inflation targeting is implemented in different ways – most often by adopting point targets, by having tolerance bands around a point target, or by specifying target ranges. Using data for 20 economies, this paper tests whether the various target types affect the anchoring of inflation expectations at shorter horizons differently. It tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means.

Suggested Citation

  • Ehrmann, Michael, 2021. "Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations," CEPR Discussion Papers 16046, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:16046
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    2. Le Bihan, Hervé & Marx, Magali & Matheron, Julien, 2023. "Inflation tolerance ranges in the New Keynesian model," European Economic Review, Elsevier, vol. 153(C).
    3. Kučerová, Zuzana & Pakši, Daniel & Koňařík, Vojtěch, 2024. "Macroeconomic fundamentals and attention: What drives european consumers’ inflation expectations?," Economic Systems, Elsevier, vol. 48(1).
    4. Tavares Garcia, Francisco & Cross, Jamie L., 2024. "The impact of monetary policy on income inequality: Does inflation targeting matter?," Finance Research Letters, Elsevier, vol. 61(C).
    5. Goran Petrevski, 2023. "Macroeconomic Effects of Inflation Targeting: A Survey of the Empirical Literature," Papers 2305.17474, arXiv.org.
    6. Henry Penikas, 2023. "Smoothing the Key Rate Pass-Through: What to Keep in Mind When Interpreting Econometric Estimates," Russian Journal of Money and Finance, Bank of Russia, vol. 82(3), pages 3-34, September.
    7. Bouche Paul, & Gerardin Mathilde, & Gautier Erwan, Savignac Frédérique & Savignac Frédérique., 2021. "Measuring firms’ inflation expectations [Mesurer les anticipations d’inflation des entreprises]," Bulletin de la Banque de France, Banque de France, issue 236.
    8. Cecion, Martina & Coenen, Günter & Gerke, Rafael & Le Bihan, Hervé & Motto, Roberto & Aguilar, Pablo & Ajevskis, Viktors & Giesen, Sebastian & Albertazzi, Ugo & Gilbert, Niels & Al-Haschimi, Alexander, 2021. "The ECB’s price stability framework: past experience, and current and future challenges," Occasional Paper Series 269, European Central Bank.
    9. Claudio Borio & Matthieu Chavaz, 2025. "Moving targets? Inflation targeting frameworks,1990–2025," BIS Quarterly Review, Bank for International Settlements, March.
    10. Yoshibumi Makabe & Yoshihiko Norimasa, 2022. "The Term Structure of Inflation at Risk: A Panel Quantile Regression Approach," Bank of Japan Working Paper Series 22-E-4, Bank of Japan.
    11. Fabio Milani, 2025. "Inflation Tolerance Bands and Private Sector Beliefs," CESifo Working Paper Series 11910, CESifo.
    12. Della Posta, Pompeo & Tamborini, Roberto, 2023. "Does an inflation target zone help or hinder price stability?," Economic Modelling, Elsevier, vol. 129(C).
    13. Агамбаева С.Б. // Agambayeva S.B. & Джусангалиева К.Е. // Jussangaliyeva K.E. & Акылбеков А.А. // Akylbekov A.A. & Ханетова А.Б. // Khanetova A.B., 2022. "Таргет по инфляции: формулировка цели и последствия ее смены. Обзор международного опыта. // Inflation Target: Formulation of the Goal and Implications of its Change. Overview of international experie," Economic Review(National Bank of Kazakhstan), National Bank of Kazakhstan, issue 3/4, pages 4-25.
    14. Michael J. Lamla & Damjan Pfajfar & Lea Rendell, 2024. "Inflation and Deflationary Biases in the Distribution of Inflation Expectations: Theory and Empirical Evidence from Nine Countries," Working Papers 24-26, Federal Reserve Bank of Cleveland.

    More about this item

    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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