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Has inflation targeting changed the conduct of monetary policy?

Author

Listed:
  • Jérôme Creel

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

  • Paul Hubert

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

Suggested Citation

  • Jérôme Creel & Paul Hubert, 2015. "Has inflation targeting changed the conduct of monetary policy?," Sciences Po Economics Publications (main) hal-03411690, HAL.
    • Handle: RePEc:hal:spmain:hal-03411690
    DOI: 10.1017/S1365100513000199
    Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03411690
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Seeking feedback: Towards a New Keynesian Theory of the Price Level
      by bankunderground in Bank Underground on 2015-07-13 12:30:00

    Citations

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    Cited by:

    1. John Barrdear, 2015. "Towards a New Keynesian Theory of the Price Level," Discussion Papers 1509, Centre for Macroeconomics (CFM).
    2. Ardakani Omid M. & Kishor N. Kundan, 2018. "Examining the success of the central banks in inflation targeting countries: the dynamics of the inflation gap and institutional characteristics," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 22(1), pages 1-19, February.
    3. Pedro J. Gutiérrez-Diez & Tibor Pál, 2023. "Monetary policy models: lessons from the Eurozone crisis," Humanities and Social Sciences Communications, Palgrave Macmillan, vol. 10(1), pages 1-19, December.
    4. Ardakani, Omid & Kishor, Kundan & Song, Suyong, 2015. "On the Effectiveness of Inflation Targeting: Evidence from a Semiparametric Approach," MPRA Paper 75091, University Library of Munich, Germany.
    5. Amlendu Dubey & Juhi Lohani, 2022. "Inflation targeting and price behaviour: evidence from India," Indian Economic Review, Springer, vol. 57(2), pages 265-284, December.
    6. Geoffrey R. Dunbar & Amy (Qijia) Li, 2019. "The Effects of Inflation Targeting for Financial Development," Staff Analytical Notes 2019-21, Bank of Canada.
    7. Christophe Blot & Jérôme Creel & Xavier Ragot, 2015. "Flexible inflation targeting vs nominal GDP targeting in the euro area," Sciences Po publications info:hdl:2441/5nf0balck39, Sciences Po.
    8. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    9. Vipul Bhatt & Amr Hosny & N. Kundan Kishor, 2017. "The Dynamic Behaviour of Implicit Inflation Targets for ‘Inflation Targeting Lite’ Economies," The Economic Record, The Economic Society of Australia, vol. 93(300), pages 67-88, March.
    10. Christophe Blot & Jérôme Creel & Xavier Ragot, 2015. "Flexible inflation targeting vs nominal GDP targeting in the euro area," Working Papers hal-03429880, HAL.
    11. Suda, Jacek & Zervou, Anastasia S., 2018. "International Great Inflation And Common Monetary Policy," Macroeconomic Dynamics, Cambridge University Press, vol. 22(6), pages 1428-1461, September.
    12. Pooja Kapoor & Sujata Kar, 2023. "A review of inflation expectations and perceptions research in the past four decades: a bibliometric analysis," International Economics and Economic Policy, Springer, vol. 20(2), pages 279-302, May.
    13. Hurn Stan & Johnson Nicholas & Silvennoinen Annastiina & Teräsvirta Timo, 2022. "Transition from the Taylor rule to the zero lower bound," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(5), pages 635-647, December.
    14. Anna Agliari & Ahmad Naimzada & Nicolò Pecora, 2017. "Nonlinear monetary policy rules in a pure exchange overlapping generations model," Journal of Evolutionary Economics, Springer, vol. 27(5), pages 1181-1203, November.
    15. Jaromir Baxa & Jan Zacek, 2022. "Monetary Policy and the Financial Cycle: International Evidence," Working Papers 2022/4, Czech National Bank, Research and Statistics Department.
    16. Chatelain, Jean-Bernard & Ralf, Kirsten, 2023. "Super-Inertial Interest Rate Rules Are Not Solutions of Ramsey Optimal Policy," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 133(1), pages 119-146.

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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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