IDEAS home Printed from https://ideas.repec.org/p/imf/imfwpa/01-166.html
   My bibliography  Save this paper

Inflation Targeting and the Unemployment-Inflation Trade-off

Author

Listed:
  • Chorng-Huey Wong
  • Eric V. Clifton
  • Gene L. Leon

Abstract

This paper examines the impact of the introduction of inflation targeting on the unemployment-inflation trade-off in OECD countries. Theoretical models suggest that the credibility-enhancing effects of the adoption of inflation targeting should cause an improvement in the unemployment-inflation trade-off, i.e., that reducing inflation by a given amount should occur with a smaller rise in unemployment. The empirical evidence examined for OECD countries adopting inflation targeting supports this hypothesis. Using a smooth transition regression model, it is shown that the improvement in this trade-off does not take place immediately after the adoption of inflation targeting; rather, it improves over time as the credibility of the central bank is established.

Suggested Citation

  • Chorng-Huey Wong & Eric V. Clifton & Gene L. Leon, 2001. "Inflation Targeting and the Unemployment-Inflation Trade-off," IMF Working Papers 01/166, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/166
    as

    Download full text from publisher

    File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=15416
    Download Restriction: no

    References listed on IDEAS

    as
    1. Hutchison, M M & Walsh, C E, 1998. "The Output-Inflation Tradeoff and Central Bank Reform: Evidence from New Zealand," Economic Journal, Royal Economic Society, vol. 108(448), pages 703-725, May.
    2. Dick van Dijk & Timo Terasvirta & Philip Hans Franses, 2002. "Smooth Transition Autoregressive Models — A Survey Of Recent Developments," Econometric Reviews, Taylor & Francis Journals, vol. 21(1), pages 1-47.
    3. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
    4. Laurence Ball & Robert Moffitt, 2001. "Productivity Growth and the Phillips Curve," NBER Working Papers 8421, National Bureau of Economic Research, Inc.
    5. Kenneth N. Kuttner & Adam S. Posen, 1999. "Does Talk Matter After All? Inflation Targeting and Central Bank Behavior," Working Paper Series WP99-10, Peterson Institute for International Economics.
    6. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    7. Miguel A Savastano & Paul R Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
    8. Posen, Adam, 1998. "Central Bank Independence and Disinflationary Credibility: A Missing Link?," Oxford Economic Papers, Oxford University Press, vol. 50(3), pages 335-359, July.
    9. Laurence Ball, 1994. "What Determines the Sacrifice Ratio?," NBER Chapters,in: Monetary Policy, pages 155-193 National Bureau of Economic Research, Inc.
    10. W. Wascher & Palle S. Andersen, 1999. "Sacrifice ratios and the conduct of monetary policy in conditions of low inflation," BIS Working Papers 82, Bank for International Settlements.
    11. Lundbergh, Stefan & Terasvirta, Timo & van Dijk, Dick, 2003. "Time-Varying Smooth Transition Autoregressive Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 21(1), pages 104-121, January.
    12. Skalin, Joakim & Ter svirta, Timo, 2002. "Modeling Asymmetries And Moving Equilibria In Unemployment Rates," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 202-241, April.
    13. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23.
    14. Patricia S. Pollard, 1993. "Central bank independence and economic performance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 21-36.
    15. Mark Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting; Practical Issues for Emerging Market Countries," IMF Occasional Papers 202, International Monetary Fund.
    16. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    17. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1-1.
    18. DiNardo, J. & Moore, M.P., 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," Papers 99-00-04, California Irvine - School of Social Sciences.
    19. Eric V. Clifton, 1999. "Inflation Targeting; What is the Meaning of the Bottom of the Band?," IMF Policy Discussion Papers 99/8, International Monetary Fund.
    20. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    21. International Monetary Fund, 1998. "Do IMF-Supported Programs Work? A Survey of the Cross-Country Empirical Evidence," IMF Working Papers 98/169, International Monetary Fund.
    22. Ernst Baltensperger & Thomas J. Jordan, 1998. "Are there Shifts in the Output-Inflation Trade-off? The Case of Switzerland," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(II), pages 121-132, June.
    23. Persson, Torsten & Tabellini, Guido, 1993. "Designing institutions for monetary stability," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 53-84, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters,in: The Inflation-Targeting Debate, pages 249-282 National Bureau of Economic Research, Inc.
    2. Samira Haddou, 2010. "Non-linéarité de la fonction de réaction des autorités monétaires tunisiennes," Économie et Prévision, Programme National Persée, vol. 195(4), pages 99-110.
    3. David Longworth, 2003. "Implications of a changing economic structure for the strategy of monetary policy : commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 349-360.
    4. Rodrigo Mariscal & Andrew Powell & Pilar Tavella, 2014. "On the Credibility of Inflation Targeting Regimes in Latin America," IDB Publications (Working Papers) 6604, Inter-American Development Bank.
    5. Viktor Kotlán & David Navrátil, 2003. "Inflation Targeting as a Stabilization Tool: Its Design and Performance in the Czech Republic," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 53(5-6), pages 220-242, May.
    6. Vincent Dropsy & Nathalie Grand, 2004. "Exchange Rate and Inflation Targeting in Morocco and Tunisia," Working Papers 0421, Economic Research Forum, revised 10 2004.
    7. Ferro, Gustavo, 2007. "Metas de inflación ¿qué hay de nuevo bajo el sol?
      [Inflation Targeting. What's new under the sun?]
      ," MPRA Paper 15069, University Library of Munich, Germany, revised 11 Mar 2008.
    8. Yu Hsing, 2015. "Short-Run Determinants of the USD/MYR Exchange Rate," Economics Bulletin, AccessEcon, vol. 35(1), pages 97-105.
    9. Ivrendi, Mehmet & Guloglu, Bulent, 2010. "Monetary shocks, exchange rates and trade balances: Evidence from inflation targeting countries," Economic Modelling, Elsevier, vol. 27(5), pages 1144-1155, September.
    10. Reginaldo P. Nogueira Junior & Miguel Leon-Ledesma, 2008. "Exchange Rate Pass-Through Into Inflation: The Role of Asymmetries and NonLinearities," Studies in Economics 0801, School of Economics, University of Kent.
    11. repec:ebl:ecbull:v:3:y:2008:i:24:p:1-14 is not listed on IDEAS
    12. Amarasekara, Chandranath, 2008. "Have the Sacrifice Ratios Changed under Inflation Targeting? An Empirical Investigation," MPRA Paper 64867, University Library of Munich, Germany.
    13. Nogueira Júnior, Reginaldo Pinto, 2010. ""Pass-through" Cambial e Ambiente Inflacionário no Brasil: Existe Alguma Relação?," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 64(1), March.
    14. Grand Nathalie & Dropsy Vincent, 2005. "Exchange Rate And Inflation Targeting In Morocco And Tunisia," Macroeconomics 0507018, EconWPA.
    15. Gerald Epstein, 2007. "Central banks as agents of employment creation," Working Papers 38, United Nations, Department of Economics and Social Affairs.
    16. Ourania Dimakou, 2010. "Central Bank Independence, Bureaucratic Corruption and Fiscal Responses - Empirical Evidence," Birkbeck Working Papers in Economics and Finance 1012, Birkbeck, Department of Economics, Mathematics & Statistics.
    17. Kontonikas, A., 2004. "Inflation and inflation uncertainty in the United Kingdom, evidence from GARCH modelling," Economic Modelling, Elsevier, vol. 21(3), pages 525-543, May.
    18. Veloso, Thiago & Meurer, Roberto & Da Silva, Sergio, 2007. "Inflation targeting and optimal control theory," MPRA Paper 3834, University Library of Munich, Germany.
    19. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
    20. Larsson, Anna & Zetterberg, Johnny, 2003. "Does Inflation Targeting Matter for Labour Markets? – Some Empirical Evidence," Working Paper Series 191, Trade Union Institute for Economic Research.
    21. Sergio Da Silva & Roberto Meurer & Thiago Veloso, 2008. "Optimal control theory for inflation targeting," Economics Bulletin, AccessEcon, vol. 3(24), pages 1-14.
    22. Rodrigo Mariscal & Andrew Powell & Pilar Tavella, 2014. "On the Credibility of Inflation Targeting Regimes in Latin America," IDB Publications (Working Papers) 86253, Inter-American Development Bank.
    23. Nicholas Apergis & Stephen M. Miller & Alexandros Panethimitakis & Athanassios Vamvakidis, 2005. "Inflation Targeting and Output Growth: Evidence from Aggregate European Data," Working papers 2005-06, University of Connecticut, Department of Economics.
    24. Lynda Khalaf & Maral Kichian, 2003. "Testing the Stability of the Canadian Phillips Curve Using Exact Methods," Staff Working Papers 03-7, Bank of Canada.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:01/166. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi). General contact details of provider: http://edirc.repec.org/data/imfffus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.