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Expectations Anchoring in Inflation Targeting Regimes

Author

Listed:
  • Oleg Korenok

    () (Department of Economics, VCU School of Business)

  • Stanislav Radchenko

    () (Department of Economics, University of North Carolina at Charlotte)

Abstract

Central banks adopt an inflation targeting policy with a goal to anchor inflation expectations. We argue that the expectations anchoring test developed in the context of the Krugman (1991) exchange rate targeting model is well-suited for inflation targeting applications. The test quantifies nonlinearity between realized and expected inflation for very high and very low inflation levels. It does not require comparison with the control group of non-targeting countries, avoiding critique of the benchmark approach. We test inflation targeting in Australia, Canada, New Zealand, Sweden, the United Kingdom and find weak support for expectations anchoring.

Suggested Citation

  • Oleg Korenok & Stanislav Radchenko, 2005. "Expectations Anchoring in Inflation Targeting Regimes," Working Papers 0503, VCU School of Business, Department of Economics.
  • Handle: RePEc:vcu:wpaper:0503
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    File URL: http://www.people.vcu.edu/~okorenok/inflationTZ.pdf
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    References listed on IDEAS

    as
    1. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series,in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
    2. Forbes, C.S. & Kofman, P., 2000. "Bayesian Soft Target Zones," Monash Econometrics and Business Statistics Working Papers 4/00, Monash University, Department of Econometrics and Business Statistics.
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    4. Li, Kai, 1999. "Exchange Rate Target Zone Models: A Bayesian Evaluation," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(5), pages 461-490, Sept.-Oct.
    5. Lundbergh, Stefan & Terasvirta, Timo, 2006. "A time series model for an exchange rate in a target zone with applications," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 579-609.
    6. Robert J. Tetlow, 2008. "Inflation Targeting and Traget Instability," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 151-192, December.
    7. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
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    More about this item

    Keywords

    monetary policy; inflation; exchange rate; target zone model; expectations anchoring;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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