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Inflation Targeting and the Unemployment-Inflation Trade-off

  • Chorng-Huey Wong
  • Eric V. Clifton
  • H. L. Leon

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/166.

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Length: 43
Date of creation: 01 Oct 2001
Date of revision:
Handle: RePEc:imf:imfwpa:01/166
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  1. John DiNardo & Mark P. Moore, 1999. "The Phillips Curve is Back? Using Panel Data to Analyze the Relationship Between Unemployment and Inflation in an Open Economy," NBER Working Papers 7328, National Bureau of Economic Research, Inc.
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  3. 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.
  4. 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.
  5. Laurence Ball, 1993. "What determines the sacrifice ratio?," Working Papers 93-21, Federal Reserve Bank of Philadelphia.
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  7. van Dijk, D.J.C. & Terasvirta, T. & Franses, Ph.H.B.F., 2000. "Smooth transition autoregressive models - A survey of recent developments," Econometric Institute Research Papers EI 2000-23/A, Erasmus University Rotterdam, Erasmus School of Economics (ESE), Econometric Institute.
  8. 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 104-21, January.
  9. 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.
  10. 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.
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  12. 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.
  13. Dave Turner & Elena Seghezza, 1999. "Testing for a Common OECD Phillips Curve," OECD Economics Department Working Papers 219, OECD Publishing.
  14. Guy Debelle, 1998. "Inflation Targeting in Practice," Occasional Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number occ23.
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  16. Marc Zelmer & Andrea Schaechter, 2000. "Adopting Inflation Targeting: Practical Issues for Emerging Market Countries," IMF Occasional Papers 202, International Monetary Fund.
  17. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  18. 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.
  19. A. Senhadji Semlali & Mohsin S. Khan, 2000. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Working Papers 00/110, International Monetary Fund.
  20. 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.
  21. Patricia S. Pollard, 1993. "Central bank independence and economic performance," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 21-36.
  22. 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.
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