Does Inflation Targeting Affect the Dispersion of Inflation Expectations?

Abstract

In this paper, we examine the effect of having an inflation targeting framework on the dispersion of inflation forecasts from professional forecasters. We use a panel data set of 25 countries-including 14 inflation targeters-with 16 years of monthly information. We find that the dispersion of long-run inflation expectations is smaller in targeting regimes after controlling for country-specific effects, time-specific effects, the level and the variance of inflation, disinflation periods, and global inflation. On average, the full effect is not observed until the third year after implementation of inflation targeting. When we differentiate between developed and developing countries, the dispersion of inflation expectations after inflation targeting is smaller and statistically significant only in developing countries. Copyright (c) 2010 The Ohio State University.

U.S. Monetary Policy Normalization and Global Interest Rates

“…While disagreement is a function of the variability of supply and demand shocks affecting the economy, Capistrán & Ramos-Francia (2010) argue that it also reflects the predictability and credibility of monetary policy-the more predictable a central bank's reaction function, the 20 This finding is in line with Obstfeld (2015), Klein and Shambaugh (2015), and Caceres, Carrière-Swallow, and Gruss (2016). 21 This corresponds to having a value of three under Reinhart and Rogoff's (2004) coarse classification index.…”

“…less likely are forecasters to disagree about the future path of inflation. Relatedly, inflation forecast disagreement has been shown to be related to de jure measures of central bank independence in G7 economies (Dovern, Fritsche, and Slacalek, 2012) and to the monetary policy regime in developing economies (Capistrán and Ramos-Francia, 2010). …”

Cross-Sectional Evidence on the Relation between Monetary Policy, Macroeconomic Conditions and Low-Frequency Inflation Uncertainty

“…Disagreement in inflation expectations is often regarded as a measure of IU (Bomberger and Frazer, 1981;Holland, 1993). While Capistrán and Ramos-Francia (2010) report that the disagreement of inflation expectations is lower in economies where inflation targeting strategies are adopted, Dovern et al (2012) document that the dispersion diminishes with increasing degrees of central bank independence.…”

“…Nevertheless, in this Section we compare our model-based uncertainty measure for the US, IU U S,t , with data from the FED's Survey of Professional Forecasters. Following Capistrán andRamos-Francia (2010) or Dovern et al (2012) we use the disagreement among forecasters to measure IU. Specifically, we measure disagreement, Dis U S,t , by the interquartile range of the individual forecasters' one-year-ahead point predictions of the annualized quarterly growth rate of the CP I.…”

Why Do Financial Market Experts Misperceive Future Monetary Policy Decisions?

“…Thus, survey data on expectations are increasingly used in the literature to evaluate central bank communication. For example, Capistrán and Ramos-Francia (2010) and Ehrmann, Eijffinger, and Fratzscher (2010) explore how the introduction of inflation targeting affects the dispersion of inflation expectations in surveys. Lange, Sack, and Whitesell (2003), Swanson (2006), Ehrmann and Fratzscher (2007), and Sturm and de Haan (2009) show that more transparent communication generally improves market participants' predictions of the central bank's interest rate decisions.…”