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Has Inflation Targeting Changed Monetary Policy Preferences?

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The literature on inflation targeting has up to now focused on its impact on macroeconomic performance or private expectations. In contrast, this paper proposes to investigate empirically whether the institutional adoption of this framework has changed the policy preferences of the central banker. We test the hypothesis that inflation targeting has constituted a switch towards a greater focus on inflation. We use three complementary methods: a structural break analysis, time-varying parameters and Markov-Switching VAR which make possible to estimate linear or nonlinear, and forward or backward looking specifications, to account for heteroskedasticity without having to assume a date break ex ante. Our main result is that inflation targeting has not led to a stronger response to inflation. We infer that the inflation targeting paradigm should not be confounded with the inflation targeting framework.

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Paper provided by Observatoire Francais des Conjonctures Economiques (OFCE) in its series Documents de Travail de l'OFCE with number 2010-14.

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Date of creation: Jul 2010
Handle: RePEc:fce:doctra:1014
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