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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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  1. Kenneth Kuttner & Adam Posen, 2007. "Do Markets Care Who Chairs the Central Bank?," Department of Economics Working Papers 2007-05, Department of Economics, Williams College.
  2. Meredith J. Beechey & Benjamin K. Johannsen & Andrew T. Levin, 2008. "Are long-run inflation expectations anchored more firmly in the Euro area than in the United States?," Finance and Economics Discussion Series 2008-23, Board of Governors of the Federal Reserve System (U.S.).
  3. Kyung-Mook Lim & David N. Weil, 2003. "The Baby Boom and the Stock Market Boom," Working Papers 2003-07, Brown University, Department of Economics.
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  7. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting and the Anchoring of Inflation Expectations in The Western Hemisphere," Working Papers Central Bank of Chile 400, Central Bank of Chile.
  8. Benjamin M. Friedman & Kenneth N. Kuttner, 1996. "A Price Target for U.S. Monetary Policy? Lessons from the Experience with Money Growth Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 77-146.
  9. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
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  11. Kenneth N. Kuttner & Adam S. Posen, 2001. "Beyond Bipolar: A Three-Dimensional Assessment of Monetary Frameworks," Working Paper Series WP01-7, Peterson Institute for International Economics.
  12. Mikhail Golosov & Larry E. Jones & Michele Tertilt, 2004. "Efficiency with endogenous population growth," Working Papers 630, Federal Reserve Bank of Minneapolis.
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  16. Ronald D Lee & Andrew Mason & Tim Miller, 1998. "Saving, Wealth, and Population," Working Papers 199805, University of Hawaii at Manoa, Department of Economics.
  17. David E. Bloom & David Canning & Guenther Fink & Jocelyn E. Finlay, 2007. "Fertility, Female Labor Force Participation, and the Demographic Dividend," PGDA Working Papers 2507, Program on the Global Demography of Aging.
  18. World Bank, 2005. "Where is the Wealth of Nations? Measuring Capital for the 21st Century," World Bank Publications, The World Bank, number 7505, September.
  19. Refet S. Gürkaynak & Brian Sack & Jonathan H. Wright, 2008. "The TIPS yield curve and inflation compensation," Finance and Economics Discussion Series 2008-05, Board of Governors of the Federal Reserve System (U.S.).
  20. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  21. A. G. Aganbegian, 2011. "Lessons of the Crisis," Problems of Economic Transition, M.E. Sharpe, Inc., vol. 53(9), pages 4-28, January.
  22. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
  23. David N. Weil & Joshua Wilde, 2009. "How Relevant Is Malthus for Economic Development Today?," American Economic Review, American Economic Association, vol. 99(2), pages 255-60, May.
  24. Richard Rogerson & Douglas Gollin, 2009. "The Greatest of All Improvements: Roads, Agriculture, and Economic Development in Africa," 2009 Meeting Papers 759, Society for Economic Dynamics.
  25. Kuttner, Kenneth N, 1994. "Estimating Potential Output as a Latent Variable," Journal of Business & Economic Statistics, American Statistical Association, vol. 12(3), pages 361-68, July.
  26. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
  27. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
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