Macroeconomic Dynamics

Articles

HAS INFLATION TARGETING CHANGED THE CONDUCT OF MONETARY POLICY?

Jérôme Creela1 c1 and Paul Huberta2

a1 OFCE—Sciences Po and ESCP Europe

a2 OFCE—Sciences Po

Abstract

We aim at establishing whether the institutional adoption of inflation targeting has changed the conduct of monetary policy. To do so, we test the hypothesis of inflation targeting translating into a stronger response to inflation in a Taylor rule with three alternative econometric models: a structural break model, a time-varying parameter model with stochastic volatility, and a Markov-switching VAR model. We conclude that inflation targeting has not led to a stronger response to inflation in the reaction function of the monetary authority. This result suggests that inflation targeting being meant to anchor inflation expectations through enhanced credibility and accountability, it may enable a central bank to stabilize inflation without pursuing aggressive action toward inflation variations.

Keywords:

  • Taylor Rule;
  • Bayesian Inference;
  • Time-Varying Parameters;
  • Markov-Switching VAR

Footnotes

  We thank the editor and associate editor of this journal and two anonymous referees for their helpful comments, as well as Philip Arestis, Jean Boivin, Camille Cornand, Hans Dewachter, Jean-Paul Fitoussi, Hubert Kempf, and Hervé Le Bihan. We thank the participants at the OFCE seminar (Paris, 2008), the EU Consent PhD School (Pau, 2008), the GPPN workshop (Beijing, 2008), the Conference on New Challenges to Central Banking (Namur, 2008), GDR Monnaie, Banque, Finance (Orléans, 2009), and the AFSE annual meeting (Paris, 2010) for fruitful discussions. The usual disclaimer applies.

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