Inflation Targeting and the Unemployment-Inflation Trade-Off

43 Pages Posted: 21 Dec 2001

See all articles by Eric V. Clifton

Eric V. Clifton

affiliation not provided to SSRN

Hyginus Leon

International Monetary Fund (IMF)

Chorng Huey Wong

affiliation not provided to SSRN

Date Written: October 2001

Abstract

This paper examines the impact of the introduction of inflation targeting on the unemployment-inflation trade-off in OECD countries. Theoretical models suggest that the credibility-enhancing effects of the adoption of inflation targeting should cause an improvement in the unemployment-inflation trade-off, i.e., that reducing inflation by a given amount should occur with a smaller rise in unemployment. The empirical evidence examined for OECD countries adopting inflation targeting supports this hypothesis. Using a smooth transition regression model, it is shown that the improvement in this trade-off does not take place immediately after the adoption of inflation targeting; rather, it improves over time as the credibility of the central bank is established.

Keywords: inflation targeting, credibility, monetary policy, Phillips curve, smooth transition regression models

JEL Classification: E52, E31, E17

Suggested Citation

Clifton, Eric V. and Leon, Hyginus and Wong, Chorng Huey, Inflation Targeting and the Unemployment-Inflation Trade-Off (October 2001). IMF Working Paper No. 01/166. Available at SSRN: https://ssrn.com/abstract=294561 or http://dx.doi.org/10.2139/ssrn.294561

Eric V. Clifton

affiliation not provided to SSRN

Hyginus Leon (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-6115 (Phone)
202-589-6115 (Fax)

Chorng Huey Wong

affiliation not provided to SSRN

No Address Available

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