How are Inflation Targets Set?

Roman Horvath and Jakub Matějů

Working Papers from Czech National Bank, Research and Statistics Department

Abstract: This paper contributes to a better understanding of how inflation targets are set. First, we gather evidence on how inflation targets are set from official central bank and government publications and from a questionnaire of our own design. Second, we estimate the determinants of the level of the inflation target in 19 inflation-targeting countries using unbalanced panel interval regressions to deal with the issue that targets are typically set as a range rather than as a point. We find that both a higher level and higher variability of inflation are associated with a higher target. The setting of the inflation target is also found to have an important international dimension, because higher world inflation is positively correlated with inflation targets. Rapidly growing countries exhibit higher inflation targets. Our results also show that authorities establish a wider target range for the inflation rate when the macroeconomic environment is less stable. We find that central bank credibility is negatively associated with the level of the inflation target, suggesting that less credible central banks are likely to recognize the risks related to anchoring inflation expectations at low levels. On the other hand, government party orientation does not matter, even in less independent central banks.

Keywords: Central bank; credibility; independence; inflation; inflation targeting. (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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https://www.cnb.cz/export/sites/cnb/en/economic-re ... wp/cnbwp_2011_06.pdf

Related works:
Journal Article: How Are Inflation Targets Set? (2011)
Working Paper: How Are Inflation Targets Set? (2011)
Working Paper: How Are Inflation Targets Set? (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:cnb:wpaper:2011/06

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