Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK

Jérôme Creel (1) , Paul Hubert (1)

1 OFCE - Observatoire français des conjonctures économiques (Sciences Po)

Since 1990, a growing number of countries have adopted inflation targeting (IT) around the world. Empirical evidence on its advantages has been mixed so far, and most assessments have been based on a control group methodology. In this paper, using a MSVAR technique, we assess the adoption of IT in three industrialised countries over time; in addition, we compare their outcomes with a non-IT country, the US. Results are manifold. First, an inflation targeting regime exists, although it does not constitute a change in monetary policy reaction. Second, this conclusion is robust on a subsample excluding the periods of high inflation and early sharp disinflation. Third, the sacrifice ratio of higher output volatility generally attributed to inflation stabilisation policies is not sensitive to the adoption of inflation targeting. Fourth, this framework is shown to be conducive to higher monetary policy leeway.

Mots clés: Inflation targeting; MSVAR; Counterfactuals

Domaines: Economies et finances

Jérôme Creel, Paul Hubert. Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical evidence from Canada, Sweden and the UK. 57ème Congrès de l'AFSE, Sep 2008, Paris, France. pp.1-39. ⟨hal-01064264⟩