Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical Evidence from Sweden

15 Pages Posted: 25 Jul 2009  

Jerome Creel

Observatoire Francais des Conjonctures Economiques (OFCE); ESCP Europe

Paul Hubert

OFCE - Sciences Po

Date Written: June 2009

Abstract

We study whether the adoption of inflation targeting (IT) has constituted a regime switch in Sweden using a Markov-Switching VAR technique. We assess, based on two different specifications, the relative preference for inflation in the monetary reaction function and the capacity of IT to reduce uncertainty through the anchoring of expectations. We show at the policy level that IT has constituted a switch to a lower focus on inflation, in sharp contrast with the usual argument that has been put forth by IT opponents. At the environment level, IT adoption can be shown to have reduced uncertainty. Last, counterfactuals suggest IT provides higher monetary policy leeway.

Keywords: monetary policy, inflation targeting, MSVAR, regime-switching, counterfactuals, Sweden

JEL Classification: E52, E58

Suggested Citation

Creel, Jerome and Hubert, Paul, Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical Evidence from Sweden (June 2009). Available at SSRN: https://ssrn.com/abstract=1438023 or http://dx.doi.org/10.2139/ssrn.1438023

Jerome Creel (Contact Author)

Observatoire Francais des Conjonctures Economiques (OFCE) ( email )

69 Quai d'Orsay
Paris 75007
France
+33 1 44 18 54 78 (Fax)

ESCP Europe ( email )

79, avenue de la République
Paris, 75011
France

Paul Hubert

OFCE - Sciences Po ( email )

69 Quai d'Orsay
Paris 75007
France

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