Has Inflation Targeting Changed the Conduct of Monetary Policy?

Abstract

We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

Examining the Success of the Central Banks in Inflation Targeting Countries: The Dynamics of Inflation Gap and the Institutional Characteristics

“…The finding that the IT countries have been successful in achieving their target is consistent with the literature suggesting that the IT regime leads to a gradual build up in the credibility of the central banks (Neumann and von Hagen (2002), Carare and Stone (2006), Creel and Hubert (2010), de Mendonça and de Guimarães e Souza (2012)). The finding that there is considerable cross-country heterogeneity in the performance of the central banks immediately after the adoption is consistent with the literature which suggests the countries that started with high inflation tended to have benefited more from the IT regime in terms of lower level and volatility of inflation over a medium to long-horizon.…”

Does Inflation Targeting Matter? An Experimental Investigation

“…Although our experimental study has been conducted in a controlled environment and the applicability of our results should be handled carefully, we argue that the irrelevance of explicit inflation targeting when the central bank is an inflation targeter does not mean that opponents of inflation targeting [Ball and Sheridan (2005) Creel and Hubert (2015).…”

Towards a New Keynesian Theory of the Price Level

“…15 Creel and Hubert (2015) investigate the transition to inflation targeting in Canada, Sweden and the UK, using a structural break test, estimates of time-varying parameters and a Markov-Switching VAR. They find that coefficients against inflation in estimated policy decision rules did not materially change with the transition and, more importantly, remained solidly below one.…”