Does Inflation Targeting Make a Difference

Oscar Landerretche, Vittorio Corbo and Klaus Schmidt-Hebbel

Working Papers Central Bank of Chile from Central Bank of Chile

Abstract: Inflation targeters (ITers) have been very successful in meeting their inflation targets (ITs). Industrial output sacrifice during inflation stabilization and industrial output volatility has frequently been lowered after IT adoption. ITers have consistently reduced inflation forecast errors after IT adoption. The influence of price and output shocks on the behavior of inflation and output gaps has changed much more strongly among ITers than in non-targeting industrial countries in the course of the 1990s. IT has played a role in strengthening the effect of forward-looking expectations on inflation, hence weakening the weight of past inflation inertia. Central bankers’ aversion to inflation is on average not different among ITers in comparison to non-inflation targeters (NITers) but has risen in emerging-country ITers. ITers have gradually reaped a credibility gain, allowing them to achieve their targets with smaller changes in interest rates in the late 1990s than those required in the early 1990s. Chile’s decade-long IT experience toward low stationary inflation shows that gradual phasing in of IT helped in reducing inflation expectations and inflation gradually, and resulted in lower output sacrifice that under a counterfactual more agressive strategy.

Date: 2001-09
New Economics Papers: this item is included in nep-cba, nep-lam, nep-mon and nep-pke
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Related works:
Chapter: Does Inflation Targeting Make a Difference? (2007)
Working Paper: Does Inflation Targeting Make a Difference? (2007)
Working Paper: Does Inflation Targeting Make a Difference? (2006)
Working Paper: Does Inflation Targeting Make a Difference? (2006)
Chapter: Does Inflation Targeting Make a Difference? (2002)
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