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Targeting inflation in the 1990s: recent challenges

Author

Listed:
  • Richard T. Freeman
  • Jonathan L. Willis

Abstract

This paper provides an evaluation of the effectiveness of inflation targeting in four industrial countries --New Zealand, Canada, the United Kingdom, and Sweden --focussing on the recent period of economic recovery. Evidence drawn from fmancial market data suggests that credibility of their inflation targeting regimes on balance has deteriorated during the past year and a half, as reflected mainly in sizeable increases in medium-and long-term interest rates. Even after accounting for spillovers from increases in real rates globally (which appear to have been important) and cyclical effects, recent increases in long-term interest rates appear to be incompatible with the possibility that market expectations for inflation have remained on track with official objectives. The deterioration of credibility during this period, however, is considerably less than is implied by changes in nominal interest rates alone and varies considerably across targeting countries. Other evidence suggests that, although inflation targets have not had any detectable effect in altering the time-series characteristics of nominal interest rates (and, by implication, of inflation­expectations formation), there is mixed evidence that inflation targets may have helped stabilize inflation expectations and possibly lowered the inflation-risk premium in some countries.

Suggested Citation

  • Richard T. Freeman & Jonathan L. Willis, 1995. "Targeting inflation in the 1990s: recent challenges," International Finance Discussion Papers 525, Board of Governors of the Federal Reserve System (U.S.).
  • Handle: RePEc:fip:fedgif:525
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    References listed on IDEAS

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    13. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
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    Cited by:

    1. International Monetary Fund, 2005. "Inflation Targeting and Output Growth; Empirical Evidence for the European Union," IMF Working Papers 05/89, International Monetary Fund.
    2. Kisu Simwaka, 2004. "The feasibility of adopting inflation targeting in Malawi: an empirical analysis," Macroeconomics 0407015, EconWPA.
    3. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.

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