INFLATION TARGETING IN PRACTICE: FURTHER EVIDENCE

Jim Lee

Contemporary Economic Policy, 1999, vol. 17, issue 3, 332-347

Abstract: This paper empirically investigates the plausibility, which has been argued but not fully established, that the efficacy of the inflation‐targeting strategy recently implemented by New Zealand, Canada, and the U.K. has been an artifact of a global disinflationary environment. A data decomposition procedure, which involves cointegration and canonical correlation analysis, is used to remove common trend and cyclical components from historical data that these three countries share with their nontargeting neighboring countries, namely, Australia, the U.S., and Germany, respectively. Simulations based on resulting country‐specific data for inflation and other economic aggregates reveal scant evidence of regime‐shift effects as exhibited in observed data. This contrast in findings highlights the extent to which cross‐country synchronization in economic activity has on the performance of small open economies. (JEL C32, E52, E58)

Date: 1999
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