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.
Publisher
Cambridge University Press (CUP)
Subject
Economics and Econometrics
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