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How Flexible Can Inflation Targeting Be and Still Work?

This paper takes up the issue of the flexibility of inflation targeting regimes, with the specific goal of determining whether the monetary policy of the Bank of England, which has a formal inflation target, has been any less flexible than that of the Federal Reserve, which does not have such a target. The empirical analysis uses the speed of inflation forecast convergence, estimated from professional forecastersÂ’ predictions at successive forecast horizons, to gauge the perceived flexibility of the central bankÂ’s response to macroeconomic shocks. Based on this criterion, there is no evidence to suggest that the Bank of EnglandÂ’s inflation target has compelled it to be more aggressive in pursuit of low inflation than the Federal Reserve.

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File URL: http://web.williams.edu/Economics/wp/KuttnerPosenHowFlexibleCanInflationTargetingBe.pdf
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Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2011-10.

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Length: 36 pages
Date of creation: Sep 2011
Date of revision: Sep 2011
Handle: RePEc:wil:wileco:2011-10
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