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A New Test for the Success of Inflation Targeting

  • Verónica Cohen Sabbán
  • Martín Gonzalez Rozada
  • Andrew Powell

We propose a new test, derived from a set of variance decompositions of a structural VAR, for the success of inflation targeting. In contrast to standard sacrifice ratios this test considers changes in the structure of real and nominal shocks; second moment effects. We find strong support for IT with 7 of the 9 countries in our sample having negative “sacrifices” and many countries with “benefits”. However, we also find very different performances across IT countries. We find that “IT success” depends on the size of the real shocks suffered but controlling for this there are differences in country performance.

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Paper provided by Universidad Torcuato Di Tella in its series Business School Working Papers with number inflationtargeting.

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Length: 36 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:udt:wpbsdt:inflationtargeting
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  1. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  2. Guy Debelle, 1997. "Inflation Targeting in Practice," IMF Working Papers 97/35, International Monetary Fund.
  3. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  4. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
  5. R. Dornbusch, 1975. "Exchange Rate Dynamics," Working papers 167, Massachusetts Institute of Technology (MIT), Department of Economics.
  6. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  7. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
  8. Enders, Walter & Lee, Bong-Soo, 1997. "Accounting for real and nominal exchange rate movements in the post-Bretton Woods period," Journal of International Money and Finance, Elsevier, vol. 16(2), pages 233-254, April.
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