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Inflation Dynamics and Monetary Strategies: Evidence from Six Industrialized Countries

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Abstract

In this paper we address the issue whether a switch to inflation targeting can help build monetary policy credibility and can substitute for a track record of low inflation. To this end, we empirically evaluate the success of inflation targeting in Canada, New Zealand and the United Kingdom and investigate to what extent the joint dynamic processes of inflation and nominal interest rates in these three countries have experienced a structural break at the time of the regime switch to inflation targeting. The experience of Canada, New Zealand and the United Kingdom is matched with the United States, Australia and Germany. We find that the effectiveness of the direct inflation targeting approach to quickly increase low-inflation credibility so far is ambiguous and that this strategy is not clearly superior to intermediate monetary strategies.

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Authors and Affiliations

  1. De Nederlandsche Bank, The Netherlands

    Johannes M. Groeneveld

  2. LIFE, Maastricht University, P.O. Box 616, 6200 MD, Maastricht, The Netherlands

    Kees G. Koedijk & Clemens J.M. Kool

Authors
  1. Johannes M. Groeneveld
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  2. Kees G. Koedijk
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  3. Clemens J.M. Kool
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Groeneveld, J.M., Koedijk, K.G. & Kool, C.J. Inflation Dynamics and Monetary Strategies: Evidence from Six Industrialized Countries. Open Economies Review 9, 21–38 (1998). https://doi.org/10.1023/A:1008223206085

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  • DOI: https://doi.org/10.1023/A:1008223206085

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