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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: cornand@gate.cnrs.fr.
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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 

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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.

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