Some comparative evidence on the effectiveness of inflation targeting
Does the adoption of an inflation target by a country have an effect on that country's rate of inflation and on inflation's interaction with real economic variables? Does inflation targeting alter private-sector expectations? The question of effectiveness must be posed as a counterfactual -did target adopting countries find economic benefits they would not have found had they not targeted? We offer three sets of measurements of the effect of inflation targeting: the first concerning whether the disinflation has been achieved at lower cost, or whether inflation has come down in targeters to a greater extent than we would attribute to normal cyclical factors; second, concerning whether the interactions between inflation, monetary policy, and real variables have changed; and the third concerning whether private-sector inflation expectations have come down after targeting beyond that usually associated with a drop in inflation. We consider the performance of New Zealand, Canada, the United Kingdom, and Sweden on these measures versus three baselines: their own past patterns prior to adoption; the performance of similar countries, Italy and Australia, which did not adopt targets; and the performance of two nominal targeters of long-standing, Germany and Switzerland, over the same period. We find that inflation targeting has had measurable effects on expectations and on the course of short-term interest rates, but that sacrifice ratios and Phillips curves remain unchanged in targeting countries.
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- Posen, Adam, 1998.
"Central Bank Independence and Disinflationary Credibility: A Missing Link?,"
Oxford Economic Papers,
Oxford University Press, vol. 50(3), pages 335-359, July.
- Adam S. Posen, 1995. "Central bank independence and disinflationary credibility: a missing link?," Staff Reports 1, Federal Reserve Bank of New York.
- Hansen, Lars Peter & Hodrick, Robert J, 1980. "Forward Exchange Rates as Optimal Predictors of Future Spot Rates: An Econometric Analysis," Journal of Political Economy, University of Chicago Press, vol. 88(5), pages 829-853, October.
- Laurence Ball, 1993.
"What determines the sacrifice ratio?,"
93-21, Federal Reserve Bank of Philadelphia.
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