Working Paper: NBER ID: w12876
Authors: Frederic S. Mishkin; Klaus Schmidthebbel
Abstract: Yes, as inferred from panel evidence for inflation-targeting countries and a control group of high-achieving industrial countries that do not target inflation. Our evidence suggests that inflation targeting helps countries achieve lower inflation in the long run, have smaller inflation response to oil-price and exchange-rate shocks, strengthen monetary policy independence, improve monetary policy efficiency, and obtain inflation outcomes closer to target levels. Some benefits of inflation targeting are larger when inflation targeters have achieved disinflation and are able to make their inflation targets stationary. Despite these favorable results for inflation targeting, our evidence generally does not suggest that countries that adopt inflation targeting have attained better monetary policy performance relative to our control group of highly successful non-inflation targeters. However, inflation targeting does seem to help all country groups to move toward performance of the control group. The performance attained by industrial-country inflation targeters generally dominates performance of emerging-economy inflation targeters and is similar to that of industrial non-inflation targeting countries.
Keywords: Inflation Targeting; Monetary Policy; Economic Performance
JEL Codes: E31; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation targeting (E31) | Lower inflation in the long run (E31) |
| Inflation targeting (E31) | Smaller inflation response to oil price and exchange rate shocks (E31) |
| Inflation targeting (E31) | Strengthened monetary policy independence (E58) |
| Inflation targeting (E31) | Convergence toward the performance of successful non-targeters (C52) |