The Simplest Test of Inflation Target Credibility

Lars Svensson

No 940, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: A simple test of inflation target credibility is constructed by subtracting the maximum and minimum inflation rates consistent with the inflation targets from the yields to maturity on nominal bonds. This results in a target-consistent range of real yields on nominal bonds. If expected real yields, or market real interest rates on real bonds if they are available, fall outside the range of target-consistent real yields, credibility is rejected. Two concepts of credibility, called absolute credibility and credibility in expectation, are distinguished. The credibility of inflation targets of Canada, New Zealand and Sweden are examined diagrammatically.

Keywords: Inflation Expectations; Monetary Policy; Term Structure of Interest Rates (search for similar items in EconPapers)
JEL-codes: E43 E52 E58 G12 (search for similar items in EconPapers)
Date: 1994-04
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: The Simplest Test of Inflation Target Credibility (1993)
Working Paper: The Simplest Test of Inflation Target Credibility (1993)
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