Inflation Targeting as a Framework for Monetary Policy: A Cross‐Country Analysis

Abstract

This study makes use of a dynamic Taylor-type model to examine the conduct of monetary policy by central banks that profess to engage in inflation targeting. Previous research regarding inflation targeting and Taylor-type rules is reviewed and a dynamic Taylor-type model is developed. Tests for regime shifts upon the adoption of inflation targeting indicate a significant change in policy in each of the nations in the study for which sufficient data were available. Next, the central bank reaction functions were estimated. Results suggest that most of the central banks conducted a policy of inflation targeting by seeking to contain inflationary pressures rather than reacting to current inflation. Copyright 2003 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research.

Inflation targeting in India: issues and prospects

“…10 An important consideration in using an IT regime anywhere is deciding the price index number to which the IT policy should respond. Typically the advice is to 10 Thus Seyfried and Bremmer (2003) discover in the case of Australia that the Reserve Bank of Australia pays particular attention to inflationary pressures, as measured by the GDP gap. They find a relatively high degree of persistence and low speed of adjustment in the interest rate.…”

Has Inflation Targeting Changed the Conduct of Monetary Policy?

“…2 To our knowledge, only a few studies have been performed on this subject for countries that have adopted IT. Seyfried and Bremmer (2003) find a break in the monetary policy reaction functions of six IT countries, and they conclude that IT central banks pay more attention to inflationary pressures (proxied by the output gap) than to current inflation (whose coefficient is never significant). In opposition and for the United Kingdom specifically, Trecroci and Vassalli (2010) find, using TVP, higher response to inflation across time (but with a significantly negative interest rate smoothing parameter) and Assenmacher-Wesche (2006), using MSVAR, finds a low and nonsignificant response to inflation before IT and a higher response afterward.…”

The conduct of monetary policy in the Eurozone before and after the financial crisis

“…Bernanke and Reinhart (2004) also claim that in order to implement the monetary policy effectively at very low interest rates when the economy faces deflation, it is crucial that policymakers should act preemptively and aggressively to avoid facing the complications raised by the zero lower bound. Seyfried and Bremmer (2003) have analyzed six countries which adopted inflation targeting and they found a break in the monetary policy reaction function which leads them to conclude that the respective central banks focus primarily to inflationary pressures than to current inflation. Trecroci and Vassali (2010) estimated a TVP model and found a higher response to inflation across time by the central banks.…”