Does talk matter after all? Inflation targeting and central bank behavior

Kenneth Kuttner and Adam Posen

No 88, Staff Reports from Federal Reserve Bank of New York

Abstract: Interpretations of inflation targeting (IT) have ranged widely, from ?inflation-only targeting? without regard for output, to cheap talk without effect, to transparency increasing flexibility without cost. We characterize five interpretations of the adoption if IT as shifts between strategies in a conventional model of monetary time-inconsistency. Their implications for central bank behavior are compared to the time-series properties of inflation, and the response of interest rates to inflation movements, for three countries adopting it in the early 1990s. ; There is no evidence that IT entails a single-minded pursuit of the inflation target. For the U.K. and Canada, lower inflation levels and persistence post-adoption are combined with greater accommodation of real shocks and more stable private-sector inflation expectations. This is consistent with successful approximation of the optimal state-contingent rule. The results for New Zealand post adoption mix reduced inflation level and persistence with less stable inflation expectations, perhaps reflecting increased rule-like conservatism.

Keywords: Inflation (Finance); Banks and banking, Central; Monetary policy (search for similar items in EconPapers)
Date: 1999
New Economics Papers: this item is included in nep-mon
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Citations: View citations in EconPapers (63)

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Related works:
Working Paper: Does Talk Matter After All? Inflation Targeting and Central Bank Behavior (1999)
Working Paper: Does talk matter after all? Inflation targeting and central bank behavior (1999)
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