6533b82efe1ef96bd1293197

RESEARCH PRODUCT

Does Inflation Targeting Affect the Trade-off Between Output Gap and Inflation Variability?

Andrea CipolliniPhilip ArestisGuglielmo Maria Caporale

subject

InflationEconomics and EconometricsStochastic volatilityInflation targetingTransparency (market)media_common.quotation_subjectMonetary policyMonetary economicsTrade-offAffect (psychology)policy frontierstochastic volatility; state space model; policy frontierstate space modelOutput gapEconomicsstochastic volatilitymedia_common

description

We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade–off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade–off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non–targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation–targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework.

10.1111/1467-9957.00299http://hdl.handle.net/10447/101710