The impact of inflation targeting: Testing the good luck hypothesis

Arbeitspapier

Starting in the mid 1980s, the level and volatility of inflation decreased across industrial countries. The inflation stabilization can be explained by a shift in monetary policy or by a lucky period of low volatility in business cycle shocks. To test the "good luck hypothesis", we examine the inflation experience of Canada, one of the earliest and most successful adopters of an inflation targeting monetary policy. We Kalman-filter the historical structural shocks consistent with an estimated DSGE model. The estimated shocks are used to build counterfactual histories. The good luck hypothesis can explain only a minor portion of the change in the path and volatility of inflation after the shift in policy. Most of inflation and output stabilization is accounted by the impact on expectations. Unconditionally, the inflation targeting policy does not improve on the previous policy in terms of inflation volatility, but supports a more favorable trade-off, reducing substantially output volatility.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Danmarks Nationalbank Working Papers ; No. 152

Classification and Topics

• Classification: Wirtschaft ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Monetary Policy ; Central Banks and Their Policies
• Subject: Business cycle shocks ; Kalman filter ; Credibility ; Inflation targeting

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Ravenna, Federico ; Ingholt, Marcus Mølbak
• Event: Veröffentlichung
• (who): Danmarks Nationalbank
• (where): Copenhagen
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/227870
• Last update: 10.03.2025, 11:45 AM CET