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Empirical Investigations of Inflation Targeting

  • Yifan Hu

    ()

    (Georgetown University, Department of Economics)

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    A growing number of countries have anchored their monetary policy to an explicit numerical rate or range of inflation since such an inflation targeting framework was first adopted by New Zealand in 1989. This paper empirically investigates issues associated with inflation targeting using a dataset of 66 countries for the 1980-2000 period. The paper focuses on two issues. First, which factors are systematically associated with a country's decision to adopt inflation targeting as its monetary framework? Second, does inflation targeting improve the performance of inflation and output? Does the trade-off between inflation and output variability change under such a framework? The empirical results are informative and encouraging. A number of economic conditions, structure, and institution variables are significantly associated with the choice of inflation targeting. Both descriptive statistics and regression results suggest that inflation targeting does play a beneficial role in improving the performance of inflation and output. This paper explores an evident and positive relationship between inflation and output variability, which is different from the view based on the Taylor Curve. But the author finds limited support for the proposition that the adoption of inflation targeting improves the trade-off between inflation and output variability.

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    Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP03-6.

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    Date of creation: Jul 2003
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    Handle: RePEc:iie:wpaper:wp03-6
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    3. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
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    17. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, vol. 49(8), pages 1521-1538, November.
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    21. Francisco Nadal-De Simone, 2001. "An Investigation of Output Variance Before and During Inflation Targeting," IMF Working Papers 01/215, International Monetary Fund.
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