Does Inflation Targeting Matter for Output and Inflation Volatility? A Conditional Analysis

34 Pages Posted: 7 Oct 2009

See all articles by Luca Gambetti

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB)

Evi Pappa

London School of Economics & Political Science (LSE); Autonomous University of Barcelona - Department of Economics and Economic History

Date Written: September 1, 2009

Abstract

We address this question by examining the conditional dynamics of inflation and output growth in response to markup shocks for 14 industrialized countries. Markup shocks create a trade-off between output gap and inflation stabilization purposes, and the theory predicts that conditional on such shocks output growth should be more volatile than inflation in inflation targeting countries. Data suggest no differences between targeting and non-targeting countries in the post 1990s. Moreover, we document a similar increase in the conditional relative variability of output growth after the adoption of inflation targeting for both groups of countries. We argue that changes in the conduct of monetary policy can explain this pattern.

Keywords: conditional moments, inflation targeting, markup shocks, new policy trade-off, policy ratio, SVAR, trade-off ratio

JEL Classification: E31, E42, E58

Suggested Citation

Gambetti, Luca and Pappa, Paraskevi (Evi), Does Inflation Targeting Matter for Output and Inflation Volatility? A Conditional Analysis (September 1, 2009). Paolo Baffi Centre Research Paper No. 2009-59, Available at SSRN: https://ssrn.com/abstract=1482991 or http://dx.doi.org/10.2139/ssrn.1482991

Luca Gambetti

Universitat Pompeu Fabra - Department of Economics and Business (DEB) ( email )

Barcelona, 08005
Spain

Paraskevi (Evi) Pappa (Contact Author)

London School of Economics & Political Science (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom
+44 20 7955 7584 (Phone)
+44 20 7831 1840 (Fax)

Autonomous University of Barcelona - Department of Economics and Economic History ( email )

Edifici B - Campus Bellaterra
Barcelona, 08193
Spain

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