Empirical Applications Based on Survey Data
Chapter 3 Inflation targeting makes the difference: Novel evidence o ninflation stabilization
Chapter 3 Inﬂation targeting makes the diﬀerence: Novel evidence on inﬂation stabilization 3.1 Introduction In the past decades inﬂation rates across the globe have been reduced sig- niﬁcantly. In the 1980s Latin-American countries experienced the highest inﬂation rates of all countries averaging more than 200 percent per year. In contrast, in 2007 they had an average inﬂation rate of about 6 percent. A similar process of declining inﬂation rates took place in many central and eastern European countries during the 1990s. As a group, these countries reduced their inﬂation rates substantially from, on average, 45 percent per year in the 1990s down to, on average, 5 percent per year in 2007. This process of stabilizing inﬂation was achieved under fairly diﬀerent monetary and exchange rate regimes, ranging from the adoption of inﬂation targeting combined with ﬂoating exchange rates to the abandonment of independent monetary policy by introducing currency boards or even by dollarization of the economy. While all stabilization strategies aim to increase central bank credibility in order to stabilize inﬂation expectations and, thus, inﬂation itself, inﬂation targeting is the most prominent strategy and, hence, has gained substantial support among the economics profession. So has the use of Taylor rules for characterizing central banks’ behavior. Even though theoretically inﬂation 42 Chapter 3. Inﬂation targeting targeting is proven to be consistent with monetary policy rules (Svensson, 1997, 2003), empirical evidence in favor of the...
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