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This paper asks whether inflation targeting improves economic performance, as measured by the behavior of inflation, output, and interest rates. We compare seven OECD countries that adopted inflation targeting in the early 1990s to thirteen that did not. After the early 90s, performance improved along many dimensions for both the targeting countriesand the non-targeters. In some cases the targeters improved by more; for example, average inflation fell by a larger amount. However, these differences are explained by the facts that targeters performed worse than non-targeters before the early 90s, and there is regression to the mean. Once one controls for regression to the mean, there is no evidence that inflation targeting improvesperformance.

“The performance of inflation-targeting regimes has been quite good. Inflation-targeting countries seem to have significantly reduced both the rate of inflation and inflation expectations beyond that which would likely have occurred in the absence of inflation targets.” (Mishkin, 1999, p. 595)

[The U.K. data show] “that not only has inflation been lower since inflation targeting wasintroduced, but that, as measured by its standard deviation, it has also been more stable than in recent decades. Moreover, inflation has been less persistent – in the sense that shocks to inflation die away more quickly – under inflation targeting than for most of the past century.”(King, 2002, p. 2).

“One of the main benefits of inflation targets is that they may help to “lock in” earlierdisinflationary gains, particularly in the face of one-time inflationary shocks. We saw this effect, for example, following the exits of the United Kingdom and Sweden from the European Exchange Rate Mechanism and after Canada’s 1991 imposition of the Goods and Services Tax. In each case, the reigniting of inflation seems to have been avoided by the announcement of inflation targets that helped to anchorthe public’s inflation expectations and to give an explicit plan for and direction to monetary policy.” (Bernanke et al., 1999, p.288).


Economists have long sought the ideal framework for monetary policy. Since the early 1990s, many have come to believe they have finally found the right approach: inflation targeting. Proponents of this policy cite many benefits. Inflationtargeting solves the dynamic consistency problem that produces high average inflation. It reduces inflation variability, and if “flexible” it can stabilize output as well (Svensson, 1997). Targeting locks in expectations of low inflation, which reduces the inflationary impact of macroeconomic shocks. For these reasons, many economists advocate inflation targeting for the Federal Reserve and theEuropean Central Bank.

This paper attempts to measure the effects of inflation targeting on macroeconomic performance. We examine twenty OECD countries, seven that adopted inflation targeting during the 1990s and thirteen that did not. Not surprisingly, economic performance varies greatly across individual countries, both targeters and non-targeters. But on average, there is no evidence thatinflation targeting improves performance as measured by the behavior of inflation, output, or interest rates.

If we examine inflation-targeting countries alone, we see that their performance improved on average between the period before targeting and the targeting period. For example, inflation fell and became more stable, and output growth also stabilized. However, countries that did not adoptinflation targeting also experienced improvements around the same times as targeters. This finding suggests that better performance resulted from something other than targeting.

For some performance measures, both inflation targeters and non-targeters improve over time, but the improvements are larger for targeters. For example, average inflation fell for both groups between the pre-targeting...
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