Anchoring of Inflation Expectations: Do Inflation Target Formulations Matter?

Chistoph Grosse-Steffen
Authors registered in the RePEc Author Service: Christoph Grosse Steffen

Working papers from Banque de France

Abstract: Inflation target formulations differ across countries and over time. Most widespread are point targets, target ranges, hybrid combinations of the two, or mere definitions of price stability. This paper proposes a novel empirical measure of expectations anchoring based on the cross-sectional distribution of private sector inflation point forecasts. Applying this to a panel of 29 countries, it finds three main results. First, a numerical target definition per se does not improve anchoring compared to a definition of price stability, while the formulation of a numerical reference point increases the degree of anchoring. Second, point targets and hybrid target formulations are associated with better anchoring than target ranges. Third, periods of persistent target deviations lead to an increase in tail risks to the inflation outlook. Conditional on such periods, point targets and hybrid targets attenuate tail risks to the inflation outlook, with a stronger quantitative effect for point targets. The results are consistent with models suggesting that targets ranges are interpreted as zones where monetary policy is less active.

Keywords: Monetary Policy; Inflation Targeting; Expectations Anchoring; Survey Forecasts; Inflation Risk (search for similar items in EconPapers)
JEL-codes: D84 E42 E52 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2021
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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