Has the Adoption of Inflation Targeting Represented a Regime Switch? Empirical Evidence from Sweden
Observatoire Francais des Conjonctures Economiques (OFCE); ESCP Europe
OFCE - Sciences Po
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.
Number of Pages in PDF File: 15
Keywords: monetary policy, inflation targeting, MSVAR, regime-switching, counterfactuals, Sweden
JEL Classification: E52, E58
Date posted: July 25, 2009