 Uncovering Financial Markets Beliefs About Inflation TargetsCahiers de recherche from Universite de Montreal, Departement de sciences economiques Abstract: This paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long-term interest rates and inflation when the latter is subject to a targeting policy by the Central Bank. Two competing models that econometrically describe agents’ inferences about inflation targets are developed and shown to generate distinct predictions on the behavior of interest rates. In an empirical application to the Canadian inflation target zone, results indicate that agents perceive the band to be substantially narrower than officially announced and asymmetric around the stated mid-point. The latter result (i) suggests that the monetary authority attaches different weights to positive and negative deviations from the central target, and (ii) challenges on empirical grounds the assumption, frequently made in the literature, that the policy maker’s loss function is symmetric (usually a quadratic function) around a desired inflation value. Keywords: inflation targets; credibility; asymmetries; nonlinear rational exctations models (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:mtl:montde:9803 Access Statistics for this paper More papers in Cahiers de recherche from Universite de Montreal, Departement de sciences economiques Contact information at EDIRC. |
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