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Does inflation targeting matter for output and inflation volatility?

Luca Gambetti and Evi Pappa
Authors registered in the RePEc Author Service: Evi Pappa () and Luca Gambetti ()

No 410, Working Papers from Barcelona School of Economics

Abstract: We address this question by examining the conditional dynamics of inflation and output growth in response to markup shocks for 14 industrialized countries. Markup shocks create a trade-off between output gap and inflation stabilization purposes, and the theory predicts that conditional on such shocks output growth should be more volatile than inflation in inflation targeting countries. Data suggest no differences between targeting and non-targeting countries in the post 1990s. Moreover, we document a similar increase in the conditional relative variability of output growth after the adoption of inflation targeting for both groups of countries. We argue that changes in the conduct of monetary policy can explain this pattern.

Keywords: conditional moments; inflation targeting; markup shocks; new policy trade-off; policy ratio; SVAR; trade-off ratio (search for similar items in EconPapers)
JEL-codes: E31 E42 E58 (search for similar items in EconPapers)
Date: 2009-04
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