Point targets, tolerance bands or target ranges? Inflation target types and the anchoring of inflation expectations

Michael Ehrmann

Journal of International Economics, 2021, vol. 132, issue C

Abstract: Inflation targeting is implemented in different ways – typically by adopting point targets, with or without tolerance bands, or by specifying target ranges. Using data for 20 economies (half of which are advanced and emerging market economies, respectively), this paper tests whether the various target types anchor inflation expectations differently. By studying to what extent inflation expectations are responsive to past inflation and how much forecasters disagree, it tests two contradictory hypotheses, namely that targets with intervals lead to (i) less anchoring, e.g. because they provide more flexibility to the central bank, or (ii) better anchoring, because they are missed less often, leading to an enhanced credibility. The evidence refutes the first hypothesis, and generally finds that target ranges or (in some cases) tolerance bands outperform the other types. However, the effects partially depend on the economic context and no target type consistently outperforms all others. This suggests that there are some benefits to adopting intervals, but the central bank can anchor inflation expectations also by other means.

Keywords: Inflation targeting; Inflation expectations; Point target; Tolerance band; Target range (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations (2021)
Working Paper: Point Targets, Tolerance Bands, or Target Ranges? Inflation Target Types and the Anchoring of Inflation Expectations (2021)
Working Paper: Point targets, tolerance bands, or target ranges? Inflation target types and the anchoring of inflation expectations (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:132:y:2021:i:c:s0022199621000945

DOI: 10.1016/j.jinteco.2021.103514

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