The Macroeconomic Effects of Inflation Targeting

By Andrew T. Levin, Fabio Natalucci, Jeremy Piger. 2004

473 citations recorded by the source corpus.

We find evidence that inflation targeting (IT) plays a role in anchoring long-run inflation expectations and in reducing the intrinsic persistence of inflation. Over the period since 1994, private-sector long-run inflation forecasts for the United States and the euro area exhibit significant correlation with lagged inflation, whereas this correlation is largely absent for Australia, Canada, New Zealand, Sweden, and the United Kingdom, indicating that these five inflation targeters have been quite successful in delinking expectations from realized inflation. Furthermore, we show that the null hypothesis of a random walk in core CPI inflation can be clearly rejected for four of these five countries, but not for either the U.S. or the euro area. Finally, we provide some evidence concerning the initial effects of the adoption of IT in a number of emerging-market economies.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/f1740a9e59fab3196ed7de782d4a72cf151b4226

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Citations in the corpus

Inflation Targeting and Inflation Behavior: A Successful Story? (2012, background): “Second, it is generally stated that inflation uncertainty results from factors exogenous to the scope of the transmission mechanism of monetary policy (terms of trade or supply shocks, for instance) as well as from monetary policy shocks.”
Information Rigidity and the Expectations Formation Process: A Simple Framework and New Facts (2012, unknown): “First, we focus on relatively short-run forecasting horizons, while Levin et al. (2004) and Gürkaynak el al (2006) emphasize the effects of inflationtargeting on long-run inflation expectations.”
State of the art of inflation targeting (2012, background): “By examining the extent to which expected inflation moves in response to economic news, Levin et al (2004) find evidence that inflation persistence is lower, and expectations better anchored, in inflation-targeting countries.(2)”
THE INFLATION TARGETING DEBATE (2005, background): “Adoption of inflation targeting is clearly an endogenous choice as has been pointed out by Mishkin and Schmidt-Hebbel (2002) and Gertler (2005), and so finding that better performance is associated with inflation targeting may not imply that inflation targeting causes this better performance.”
Does Inflation Targeting Affect the Dispersion of Inflation Expectations (2010, methodology): “3Bernanke et al. (1999), Gonçalves and Salles (forthcoming), Gürkaynak et al. (2006), Johnson (2002), Levin et al. (2004), Mishkin and Schmidt-Hebbel (2007), and Vega and Winkelried (2005). in ation expectations would be larger in the non-IT country.”
Optimal Central Bank Transparency (2008, unknown): “This result is obtained by rearranging the persistence measures obtained for several countries by Levin et al. (2004).”
Inflation Targeting: What Have We Learned? (2009, methodology): “To investigate more formally whether inflation targeting has had a statistically significant impact on output growth volatility, the propensity score methodology employed by Lin and Ye (2007) to study inflation can be replicated for industrial production.”
Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence (2008, unknown): “Turning to inflation persistence, Levin et al. (2004) and Luca Benati (forthcoming) find it to be considerably lower—sometimes even negative! —in the presence of inflation targets.”
Did the Crisis Affect Inflation Expectations (2012, background): “Consistently with Levin, Natalucci, and Piger (2004), they concluded that a numerical inflation target has helped anchor long-term inflation expectations.”