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HAS INFLATION TARGETING CHANGED THE CONDUCT OF MONETARY POLICY?

Published online by Cambridge University Press:  25 July 2013

Jérôme Creel  and
Paul Hubert
Jérôme Creel*
Affiliation:
OFCE—Sciences Po and ESCP Europe
Paul Hubert
Affiliation:
OFCE—Sciences Po
*
Address correspondence to: Jérôme Creel, OFCE—Sciences Po and ESCP Europe, 69, quai d'Orsay, 75340 Paris Cedex 07, France; e-mail: jerome.creel@ofce.sciences-po.fr.
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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 RuleBayesian InferenceTime-Varying ParametersMarkov-Switching VAR

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Type
Articles
Information
Macroeconomic Dynamics , Volume 19 , Issue 1 , January 2015 , pp. 1 - 21
Copyright
Copyright © Cambridge University Press 2013 

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