Has inflation targeting changed the conduct of monetary policy?

Jérôme Creel (1) , Paul Hubert (1)

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

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.

Mots clés: Taylor Rule; Bayesian Inference; Time-Varying Parameters; Markov-Switching VAR

Domaines: Economies et finances

Jérôme Creel, Paul Hubert. Has inflation targeting changed the conduct of monetary policy?. Macroeconomic Dynamics, 2015, 19 (01), pp.1 - 21. ⟨10.1017/S1365100513000199⟩. ⟨hal-03411690⟩