Inflation Targeting and the Unemployment-Inflation Trade-off

Author/Editor:

Chorng-Huey Wong ; Eric V. Clifton ; Gene L. Leon

Publication Date:

October 1, 2001

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper examines the impact of the introduction of inflation targeting on the unemployment-inflation trade-off in OECD countries. Theoretical models suggest that the credibility-enhancing effects of the adoption of inflation targeting should cause an improvement in the unemployment-inflation trade-off, i.e., that reducing inflation by a given amount should occur with a smaller rise in unemployment. The empirical evidence examined for OECD countries adopting inflation targeting supports this hypothesis. Using a smooth transition regression model, it is shown that the improvement in this trade-off does not take place immediately after the adoption of inflation targeting; rather, it improves over time as the credibility of the central bank is established.

Series:

Working Paper No. 2001/166

Subject:

Disinflation Inflation Inflation targeting Labor Monetary policy Prices Unemployment Unemployment rate

English

Publication Date:

October 1, 2001

ISBN/ISSN:

9781451858105/1018-5941

Stock No:

WPIEA1662001

Pages:

43

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