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Band or point inflation targeting? An experimental approach

Author

Listed:
  • Camille Cornand

    () (GATE Lyon Saint-Étienne - Groupe d'analyse et de théorie économique - ENS Lyon - École normale supérieure - Lyon - UL2 - Université Lumière - Lyon 2 - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon - UJM - Université Jean Monnet [Saint-Étienne] - Université de Lyon - CNRS - Centre National de la Recherche Scientifique)

  • Cheick Kader M’baye

Abstract

Abstract We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small uncorrelated shocks, the level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large uncorrelated shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks.
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Suggested Citation

  • Camille Cornand & Cheick Kader M’baye, 2018. "Band or point inflation targeting? An experimental approach," Post-Print halshs-01663661, HAL.
  • Handle: RePEc:hal:journl:halshs-01663661
    DOI: 10.1007/s11403-016-0183-y
    Note: View the original document on HAL open archive server: https://halshs.archives-ouvertes.fr/halshs-01663661
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    References listed on IDEAS

    as
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    Cited by:

    1. Camille Cornand & Paul Hubert, 2018. "On the external validity of experimental inflation forecasts: A comparison with five categories of field expectations," Working Papers halshs-01890770, HAL.

    More about this item

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior

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