Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes
Aggregate shocks that move output and inflation in opposite directions create a tradeoff between output and inflation variability, forcing central bankers to make a choice. Differences in the degree of accommodation of shocks lead to disparate variability outcomes, revealing national central banker's relative weight on output and inflation variability in their preferences. We use estimates of the structure of 23 industrialized and developing economies, including nine that target inflation explicitly, together with the realized output and inflation patterns in those countries, to infer the degree of policymakers' inflation variability aversion. Our results suggest that both countries that introduced inflation targeting, and non-targeting European Union countries approaching monetary union, increased their revealed aversion to inflation variability, and likely suffered most increases in output volatility as a result.
|Date of creation:||Dec 1999|
|Date of revision:|
|Publication status:||published as chapter 9 in "Monetary Policy: Rules and Transmission Mechanisms," edited by Norman Loayza and Klaus Schmidt-Hebbel, Volume 4 of the Central Bank of Chile Series on Central Banking, Analysis and Economic Policy, (2002), pp. 247-274|
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