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Does Inflation Targeting Affect the Trade–off Between Output Gap and Inflation Variability?
Author(s) -
Arestis Philip,
Caporale Guglielmo Maria,
Cipollini Andrea
Publication year - 2002
Publication title -
the manchester school
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.361
H-Index - 42
eISSN - 1467-9957
pISSN - 1463-6786
DOI - 10.1111/1467-9957.00299
Subject(s) - inflation targeting , economics , transparency (behavior) , monetary policy , output gap , inflation (cosmology) , monetary economics , volatility (finance) , international economics , econometrics , physics , theoretical physics , political science , law
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.