Inflation Targeting as a Shock Absorber

60 Pages Posted: 3 Jan 2018

See all articles by Marcel Fratzscher

Marcel Fratzscher

DIW Berlin; Centre for Economic Policy Research (CEPR)

Christoph Grosse Steffen

Banque de France

Malte Rieth

German Institute for Economic Research (DIW Berlin)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2017

Abstract

We study the characteristics of inflation targeting as a shock absorber in response to large shocks in the form of natural disasters for a sample of 76 countries over the period 1970-2015. We find that inflation targeting improves macroeconomic performance following such shocks as it lowers inflation, raises output growth, and reduces inflation and growth variability compared to alternative monetary regimes. This performance is mostly due to a stronger response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard but not soft targeting reaps the fruits: deeds, not words, matter for successful monetary stabilization.

Keywords: Monetary Policy, Central Banks, Monetary Regimes, Dynamic Effects

JEL Classification: E42, E52, E58

Suggested Citation

Fratzscher, Marcel and Grosse Steffen, Christoph and Rieth, Malte, Inflation Targeting as a Shock Absorber (December 1, 2017). Banque de France Working Paper No. 655. Available at SSRN: https://ssrn.com/abstract=3095519 or http://dx.doi.org/10.2139/ssrn.3095519

Marcel Fratzscher

DIW Berlin ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christoph Grosse Steffen (Contact Author)

Banque de France ( email )

Paris
France

Malte Rieth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstra├če 58
Berlin, 10117
Germany

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