Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance

WenShwo Fang (), Stephen M. Miller () and ChunShen Lee ()

No 2009-14, Working papers from University of Connecticut, Department of Economics

Abstract: Recent studies evaluate the effectiveness of inflation targeting through the average treatment effect and generally conclude the window-dressing view of the monetary policy for industrial countries. This paper argues that the evidence of irrelevance emerges because of a time-varying relationship (treatment effect) between the monetary policy and its effects on economic performance over time. Targeters achieve lower inflation immediately following the adoption of the policy as well as temporarily slower output growth and higher inflation and output growth variability. But these short-run effects will eventually disappear in the long run. This paper finds substantial empirical evidence for the existence of such intertemporal tradeoffs for eight industrial inflation-targeting countries. That is, targeting inflation significantly reduces inflation at the costs of a lower output growth and higher inflation and growth variability in the short-run, but no substantial effects in the medium to the long-run.

Keywords: inflation targeting; time-varying treatment effects; short-run costs; long-run irrelevance (search for similar items in EconPapers)
JEL-codes: C23 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2009-06
Note: This paper was presented at the 84th annual conference of the Western Economic Association International in Vancouver, BC.
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Working Paper: Inflation Targeting Evaluation: Short-run Costs and Long-run Irrelevance (2009)
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