Does Inflation Targeting Reduce the Dispersion of Price Setters’ Inflation Expectations?

Charlotte Paulie ()
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Charlotte Paulie: Department of Economics, Postal: Department of Economics, Uppsala University, P.O. Box 513, SE-751 20 Uppsala, Sweden

No 2018:16, Working Paper Series from Uppsala University, Department of Economics

Abstract: Using detailed Swedish micro data on prices and costs, this paper documents a decrease in the dispersion of changes in prices and markups following the introduction of an official inflation target of 2 percent. Using a structural model to decompose the change in the price-change distribution by potential explanatory factors, about 63 percent of the decrease in the price-change dispersion can be attributed to a decrease in the cross-sectional variance of inflation expectations. The lower dispersion of inflation expectations results in a lower markup dispersion and a welfare gain equivalent to a 0.79 percent increase in consumption.

Keywords: inflation targeting; price setting; misallocation; welfare (search for similar items in EconPapers)
JEL-codes: D84 E52 L11 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-01-07
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:hhs:uunewp:2018_016

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