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Inflation Targeting and Monetary Policy Activism

  • Toshitaka Sekine

    (Associate Monetary Affairs Department, Bank of Japan (E-mail: toshitaka.sekine @boj.or.jp))

  • Yuki Teranishi

    (Associate Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: yuuki.teranishi @boj.or.jp))

We estimate monetary policy activism, defined as responsiveness of the policy interest rate to inflation, among five inflation-targeting countries (the UK, Canada, Sweden, Australia and New Zealand) plus the G3 (the US, Japan and Germany) by applying a time- varying parameter with a stochastic-volatility model. We find that activism of inflation-targeting countries tends to have increased before (not after) the adoption of the inflation-targeting policy framework and that these countries have experienced a decline in activism in recent years, albeit to different degrees. We further explore this result in terms of the constraint of an inflation target range by developing a formal theoretical model in a New Keynesian framework.

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File URL: http://www.imes.boj.or.jp/research/papers/english/08-E-13.pdf
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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-13.

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Date of creation: Jul 2008
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Handle: RePEc:ime:imedps:08-e-13
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