Hostname: page-component-745bb68f8f-5r2nc Total loading time: 0 Render date: 2025-01-09T17:12:53.451Z Has data issue: false hasContentIssue false
  • English
  • Français

DOES INFLATION TARGETING MATTER? AN EXPERIMENTAL INVESTIGATION

Published online by Cambridge University Press:  30 August 2016

Camille Cornand  and
Cheick Kader M'baye
Camille Cornand*
Affiliation:
CNRS GATE-LSE and University of Lyon
Cheick Kader M'baye
Affiliation:
African Management Institute
*
Address correspondence to: Camille Cornand, GATE L-SE 93, Chemin des Mouilles, 69130 Ecully cedex, France; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We use laboratory experiments with human subjects to test the relevance of different inflation-targeting regimes. In particular and within the standard New Keynesian model, we evaluate to what extent communication of the inflation target is relevant to the success of inflation targeting. We find that if the central bank cares only about inflation stabilization, announcing the inflation target does not make a difference in terms of macroeconomic performance compared with a standard active monetary policy. However, if the central bank also cares about the stabilization of economic activity, communicating the target helps to reduce the volatility of inflation, interest rate, and output gap, although their average levels are not affected. This finding is consistent with the theoretical literature and provides a rationale for the adoption of a flexible inflation-targeting regime.

Keywords

Inflation TargetingInflation ExpectationsCentral Bank CommunicationMonetary PolicyNew Keynesian ModelLaboratory Experiments
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 2 , March 2018 , pp. 362 - 401
Copyright
Copyright © Cambridge University Press 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We are thankful to the ANR-DFG for a joint grant for financial support (ANR-12-FRAL-0013-01 StabEX). This research was performed within the framework of the LABEX CORTEX (ANR-11-LABX-0042) of Université de Lyon, within the program Investissements d'Avenir (ANR-11-IDEX-007) operated by the French National Research Agency (ANR). We acknowledge insightful comments from the Editor, William Barnett, as well as an anonymous associate editor and an anonymous referee. We also thank Jean-Pierre Allegret, Bernd Hayo, Frank Heinemann, Paul Hubert, Andrew Hughes-Hallett, Valentin Jouvanceau, Luba Petersen, Ousmane Samba Mamadou, and Marc-Alexandre Senegas for their useful comments. All remaining errors are our own.

References

REFERENCES

Adam, Klaus (2007) Experimental evidence on the persistence of output and inflation. Economic Journal 117, 603–636.CrossRefGoogle Scholar
Andolfatto, David, Hendryand, Scott, and Moran, Kevin (2008) Are inflation expectations rational? Journal of Monetary Economics 55, 406–422.CrossRefGoogle Scholar
Angeriz, Alvaro and Arestis, Philip (2008) Assessing inflation targeting through intervention analysis. Oxford Economic Papers 60, 293–317.CrossRefGoogle Scholar
Anufriev, Mikhail, Assenza, Tizianna, Hommes, Cars, and Massaro, Domenico (2013) Interest rate rules and macroeconomic stability under heterogeneous expectations. Macroeconomic Dynamics 17, 1574–1604.Google Scholar
Arifovic, Jasmina and Petersen, Luba (2015) Stabilizing Expectations at the Zero Lower Bound: Experimental Evidence. Working paper, Department of Economics, Simon Fraser University.CrossRefGoogle Scholar
Assenza, Tizianna, Heemeijer, Peter, Hommes, Cars, and Massaro, Domenico (2013) Individual Expectations and Aggregate Macro Behavior. Tinbergen Institute discussion paper 13-016/II.CrossRefGoogle Scholar
Ball, Laurence and Sheridan, Niamh (2005) Does inflation targeting matter? In Bernanke, Ben and Woodford, Michael (eds.), The Inflation Targeting Debate, pp. 249–276. Chicago: University of Chicago Press.Google Scholar
Bernasconi, Michele and Kirchkamp, Oliver (2000) Why do monetary policies matter? An experimental study of saving and inflation in an overlapping generations model. Journal of Monetary Economics 46, 315–343.Google Scholar
Branch, William (2004) The theory of rationally heterogeneous expectations: Evidence from survey data on inflation expectations. Economic Journal 114, 592–621.Google Scholar
Brito, Ricardo and Bystedt, Brianne (2010) Inflation targeting in emerging economies: Panel evidence. Journal of Development Economics 91, 198–210.CrossRefGoogle Scholar
Bullard, James and Mitra, Kaushik (2002) Learning about monetary policy rules. Journal of Monetary Economics 49, 1105–1129.Google Scholar
Capistran, Carlos and Timmermann, Allan (2009) Disagreement and biases in inflation expectations. Journal of Money, Credit and Banking 41, 365–396.Google Scholar
Chadha, Jagjit S. and Nolan, Charles (2001) Inflation targeting, transparency and interest rate volatility: Ditching monetary mystique in the UK. Journal of Macroeconomics 23, 349–366.CrossRefGoogle Scholar
Chavas, Jean-Paul (2000) On information and market dynamics: The case of the US beef market. Journal of Economic Dynamics and Control 24, 833–853.Google Scholar
Clarida, Richard, Gali, Jordi, and Gertler, Mark (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115, 147–180.Google Scholar
Coibion, Olivier and Gorodnichenko, Yuriy (2015) Information rigidity and the expectations formation process: A simple framework and new facts. American Economic Review 105, 2644–2678.Google Scholar
Creel, Jérôme and Hubert, Paul (2015) Has inflation targeting changed the conduct of monetary policy? Macroeconomic Dynamics 19, 1–21.CrossRefGoogle Scholar
Demertzis, Maria and Hughes-Hallett, Andrew (2007) Central bank transparency in theory and practice. Journal of Macroeconomics 29, 760–789.Google Scholar
Evans, Georges and Honkapohja, Seppo (2001) Learning and Expectations in Macroeconomics. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Fischbacher, Urs (2007) z-tree: Zurich toolbox for ready-made economic experiments. Experimental Economics 10, 171–178.Google Scholar
Fraga, Arminio, Goldfajn, Ilan, and Minella, Andre (2003) Inflation Targeting in Emerging Market Economies. NBER working paper 10019.Google Scholar
Friedman, Benjamin and Kuttner, Kennett (1996) A price target for U.S. monetary policy? Lessons from the experience with money growth targets. Brookings Papers on Economic Activity 1, 77–146.Google Scholar
Gurkaynak, Refet S., Levin, Andrew T., and Swanson, Eric T. (2010) Does inflation targeting anchor long-run inflation expectations? Evidence from long-term bond yields in the US, UK and Sweden. Journal of the European Economic Association 8, 1208–1242.Google Scholar
Hommes, Cars (2011) The heterogeneous expectations hypothesis: Some evidence from the lab. Journal of Economic Dynamics and Control 35, 1–24.Google Scholar
Hommes, Cars and Lux, Thomas (2013) Individual expectations and aggregate behavior in learning-to-forecast experiments. Macroeconomic Dynamics 17, 373–401.Google Scholar
Hommes, Cars, Sonnemans, Joep, Tuinstra, Jan, and van de Velden, Henk (2005) Coordination of expectations in asset pricing experiments. Review of Financial Studies 18, 955–980.Google Scholar
Johnson, David (2002) The effect of inflation targeting on the behaviour of expected inflation: Evidence from an 11 country panel. Journal of Monetary Economics 49, 1493–1519.CrossRefGoogle Scholar
Kryvtsov, Oleksiy and Petersen, Luba (2013) Expectations and Monetary Policy: Experimental Evidence. Department of Economics, Simon Fraser University, Discussion paper dp13-09.Google Scholar
Lanne, Markku, Luoma, Arto, and Luoto, Jani (2009) A naïve sticky information model of households inflation expectations. Journal of Economic Dynamics and Control 33, 1332–1344.Google Scholar
Levin, Andrew T., Natalucci, Fabio M., and Piger, Jeremy M. (2004) The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Review 86, 51–80.Google Scholar
Lin, Shu and Ye, Haichun (2007) Does inflation targeting really make a difference? Evaluating the treatment effect of inflation targeting in seven industrial countries. Journal of Monetary Economics 54, 2521–2533.CrossRefGoogle Scholar
Lin, Shu and Ye, Haichun (2009) Does inflation targeting make a difference in developing countries? Journal of Development Economics 89, 118–123.CrossRefGoogle Scholar
Marimon, Ramon and Sunder, Shyam (1995) Does a constant money growth rule help stabilize inflation? Experimental evidence. Carnegie-Rochester Conference Series on Public Policy 43, 111–156.Google Scholar
Muth, John (1961) Rational expectations and the theory of price movements. Econometrica 29, 315–335.CrossRefGoogle Scholar
Orphanides, Athanasios and Williams, John C. (2005) Imperfect knowledge, inflation expectations and monetary policy. In Bernanke, Ben and Woodford, Michael (eds.), Inflation Targeting. Chicago: University of Chicago Press.Google Scholar
Orphanides, Athanasios and Williams, John C. (2007) Inflation targeting under imperfect knowledge. In Mishkin, Frederic and Schmidt-Hebbel, Klaus (eds.), Monetary Policy Under Inflation Targeting XI, pp. 76–123. Santiago: Banco central de Chile.Google Scholar
Pesaran, M. Hashem and Weale, Martin R. (2006) Survey expectations. Handbook of Economic Forecasting 14, 715–776.CrossRefGoogle Scholar
Petersen, Luba (2014) Forecast error information and heterogeneous expectations in learning-to-forecast macroeconomic experiments. In Duffy, J. (ed.), Experiments in Macroeconomics, Research in Experimental Macroeconomics, Vol. 17, pp. 109–137. Bingley, UK: Emerald.Google Scholar
Pfajfar, Damjan and Zakelj, Blaz (2013) Inflation Expectations and Monetary Policy Design: Evidence from the Laboratory. Working paper, Tilburg University.Google Scholar
Pfajfar, Damjan and Zakelj, Blaz (2014) Experimental evidence on inflation expectation formation. Journal of Economic Dynamics and Control 44, 147–168.Google Scholar
Roger, Scott (2009) Inflation Targeting at 20: Achievements and Challenges. IMF working paper 09/236.Google Scholar
Roger, Scott and Stone, Mark (2005) On Target? The International Experience with Achieving Inflation Targets. IMF working paper 05/163.Google Scholar
Svensson, Lars E. (2010) Inflation Targeting. In Friedman, Benjamin and Woodford, Michael (eds.), Handbook of Monetary Economics, pp. 1237–1302. Amsterdam: Elsevier.Google Scholar
Swanson, Eric T. (2006) Federal Reserve transparency and financial market forecasts of short-term interest rates. Journal of Money, Credit and Banking 38, 791–819.Google Scholar
Willard, Luke B. (2012) Does inflation targeting matter? A reassessment. Applied Economics 44, 2231–2244.CrossRefGoogle Scholar
Woodford, Michael (2005) Central Bank Communication and Policy Effectiveness. NBER working paper 11898.CrossRefGoogle Scholar