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Inflation targeting as a shock absorber

Marcel Fratzscher (), Christoph Grosse-Steffen and Malte Rieth ()
Authors registered in the RePEc Author Service: Christoph Große Steffen

Journal of International Economics, 2020, vol. 123, issue C

Abstract: We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard, but not soft, targeting reaps the rewards: deeds, not words, matter for successful monetary stabilization.

Keywords: Monetary policy; Central banks; Inflation targeting; Inflation; Natural disasters (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 F41 Q54 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Inflation Targeting as a Shock Absorber (2018) Downloads
Working Paper: Inflation Targeting as a Shock Absorber (2017) Downloads
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DOI: 10.1016/j.jinteco.2020.103308

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