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Inflation Targeting and Output Growth: Evidence from Aggregate European Data

  • Nicholas Apergis

    (University of Macedonia, Greece)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

  • Alexandros Panethimitakis

    (University of Athens)

  • Athanassios Vamvakidis

    (International Monetary Fund)

This paper evaluates inflation targeting and assesses its merits by comparing alternative targets in a macroeconomic model. We use European aggregate data to evaluate the performance of alternative policy rules under alternative inflation targets in terms of output losses. We employ two major alternative policy rules, forward-looking and spontaneous adjustment, and three alternative inflation targets, zero percent, two percent, and four percent inflation rates. The simulation findings suggest that forward-looking rules contributed to macroeconomic stability and increase monetary policy credibility. The superiority of a positive inflation target, in terms of output losses, emerges for the aggregate data. The same methodology, when applied to individual countries, however, suggests that country-specific flexible inflation targeting can improve employment prospects in Europe.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2005-06.

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Length: 31 pages
Date of creation: Mar 2005
Handle: RePEc:uct:uconnp:2005-06
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