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Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries

Young Min Kim, Kyu Ho Kang and Kook Ka

International Review of Economics & Finance, 2020, vol. 67, issue C, 66-84

Abstract: This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high. (JEL classification: E52, G12, C58, E43)

Keywords: Macro-finance affine term-structure model; Parameter uncertainty; Inflation risk premium; Bayesian MCMC algorithm (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.iref.2019.12.007

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