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2001-01 EC: The Effect of Inflation Targeting on the Behavior of Expected Inflation: Evidence from an 11 country panel. (working paper)


Johnson, D.

published: 2001 | Research publication | Working Paper - Economics

ABSTRACT:  Inflation targets were introduced in the 1990s in Australia, Canada, New Zealand, Sweden and the United Kingdom. The behaviour of expected inflation, measured using surveys of professional forecasters, in these five targeting countries is compared to the behaviour of expected inflation in six non-targeting countries: France, Germany, Italy, the Netherlands, Japan and the United States. The level of expected inflation in targeting countries falls significantly relative to that in non-targeting countries after controlling for country effects, year effects, ongoing inflation reduction and the business cycle. Inflation targets did not reduce the variability of expected inflation controlling for the level of past inflation. Both targeting and non-targeting countries experienced unexpected disinflation. Inflation targets did not reduce forecast errors in the disinflation in targeting countries relative to forecast errors in non-targeting countries.

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