Endogeneity of Inflation Target
43 Pages Posted: 22 Dec 2016
Date Written: December 19, 2016
Under inflation targeting, central banks set an inflation target in advance and then try to make an actual inflation hit the target. However, central banks may have an incentive to adjust the target to actual inflation rates such as past inflation rates, to make the actual inflation rate close to the target. This paper examines this issue of “endogeneity of inflation target” by using various empirical methods with the sample of 19 inflation targeting countries. Empirical results show that an inflation rate has significantly positive effect on the inflation target of the next period. Empirical results further suggest that this endogeneity of the inflation target is found more strongly in central banks with low credibility or weak performance than in central banks with high credibility or strong performance.
Keywords: Inflation Targeting, Inflation Rate, Inflation Target, Endogeneity
JEL Classification: E31, E58
Suggested Citation: Suggested Citation