Inflation targeting makes the difference: Novel evidence on inflation stabilization

Dirk Bleich, Ralf Fendel and Jan-Christoph Rülke

Journal of International Money and Finance, 2012, vol. 31, issue 5, 1092-1105

Abstract: Though Svensson (1997, 2003) provides theoretical evidence that the introduction of inflation targeting is consistent with an inflation stabilizing monetary policy, empirical evidence that the introduction of inflation targeting actually changes central bank’s behavior is still missing. This paper aims to close this gap and estimates forward-looking monetary policy rules for 20 inflation targeting countries. To this end, we use a data set which is available to the central bank in real-time, published on a frequently basis, comparable among all countries, and which includes the periods before and after the introduction of inflation targeting. We find that the introduction of inflation targeting significantly shifts the central bank’s reaction function toward inflation stabilizing. We also provide evidence of time-varying effects and find that central banks stabilize inflation once inflation targeting is introduced. We take our results as strong evidence that the introduction of inflation targeting makes the difference for monetary policy strategies.

Keywords: Monetary policy; Taylor rule; Inflation targeting (search for similar items in EconPapers)
JEL-codes: C33 D84 E52 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:31:y:2012:i:5:p:1092-1105

DOI: 10.1016/j.jimonfin.2011.12.012

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