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Does talk matter after all? Inflation targeting and central bank behavior

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  • Kenneth N. Kuttner
  • Adam S. Posen

Abstract

Interpretations of inflation targeting (IT) have ranged widely, from ?inflation-only targeting? without regard for output, to cheap talk without effect, to transparency increasing flexibility without cost. We characterize five interpretations of the adoption if IT as shifts between strategies in a conventional model of monetary time-inconsistency. Their implications for central bank behavior are compared to the time-series properties of inflation, and the response of interest rates to inflation movements, for three countries adopting it in the early 1990s. ; There is no evidence that IT entails a single-minded pursuit of the inflation target. For the U.K. and Canada, lower inflation levels and persistence post-adoption are combined with greater accommodation of real shocks and more stable private-sector inflation expectations. This is consistent with successful approximation of the optimal state-contingent rule. The results for New Zealand post adoption mix reduced inflation level and persistence with less stable inflation expectations, perhaps reflecting increased rule-like conservatism.

Suggested Citation

  • Kenneth N. Kuttner & Adam S. Posen, 1999. "Does talk matter after all? Inflation targeting and central bank behavior," Staff Reports 88, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:88
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    More about this item

    Keywords

    Inflation (Finance); Banks and banking; Central; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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