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Inflation Targets as a Stabilisation Device

Listed author(s):
  • Mahadeva, Lavan

    (Bank of England)

  • Gabriel Sterne

Over 80% of countries using explicit inflation targets in 2000 were doing so either as part of a disinflation strategy, or when inflation was neither low nor stable. Our illustrative theoretical model suggests annual revisions to short-run targets are endogenous to inflation outcomes during disinflation as long as the policymaker cares about misses from both the short-run target and a long-run target. Furthermore, target revisions will are larger when the target is undershot compared to when the target is overshot. We confirm the result using cross-country panel estimates from a unique data-set of inflation target misses in 60 countries in the 1990s. During disinflation it is therefore relatively difficult to separate decisions about target-setting from implementation. Short-term targets on a disinflation path may be more akin to conditional forecasts than policy rules, but their publication may nevertheless increase transparency and hence help policymakers to achieve lower inflation.

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Paper provided by Royal Economic Society in its series Royal Economic Society Annual Conference 2002 with number 134.

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Date of creation: 29 Aug 2002
Handle: RePEc:ecj:ac2002:134
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