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Keep your Word: Time‐varying Inflation Targets and Inflation Targeting Performance
Author(s) -
Tas Bedri Kamil Onur,
Demir Ishak
Publication year - 2014
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/manc.12005
Subject(s) - inflation (cosmology) , economics , inflation targeting , monetary policy , monetary economics , real interest rate , exchange rate , balance (ability) , interest rate , keynesian economics , macroeconomics , psychology , physics , neuroscience , theoretical physics
This paper investigates the implicit inflation targets of inflation targeting ( IT ) central banks ( CBs ). The implicit (perceived) inflation targets of IT CBs derived from their actions (policy interest rates) are calculated before and after IT adoption. We conclude that after adoption of IT implicit targets become significantly lower. Other factors that cause CBs to change their implicit targets are inflation, exchange rate and trade balance. Finally, we find that CBs that do not follow their announced targets miss their inflation targets. The results indicate that IT CBs should follow their announced targets when setting policy interest rates.