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An Assessment of Inflation Targeting in a Quantitative Monetary Business Cycle Framework

Dooyeon Cho and Dong-Eun Rhee

No 12-7, Working Papers from Korea Institute for International Economic Policy

Abstract: This paper examines the effectiveness of inflation targeting to stabilize the real economy of the advanced countries where inflation targeting was adopted in the early 1990s. This paper employs the monetary business cycle accounting methodology recently developed by Šustek (2011) which is an extended version of Chari, Kehoe, and McGrattan (2007) to monetary models in order to quantitatively assess inflation targeting. Our main finding is that the monetary policy wedge, which captures economic fluctuations caused by monetary policy, has significantly declined since the implementation of inflation targeting in the early 1990s. The results suggest that advanced economies such as Australia, Canada, Sweden, and the UK, that adopted inflation targeting in the early 1990s have been successful in stabilizing business cycle fluctuations.

Keywords: Monetary Business; Cycle Accounting; Inflation Targeting (search for similar items in EconPapers)
JEL-codes: E13 E32 E52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2012-12-31
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