Inflation Targeting and Output Growth: Empirical Evidence for the European Union
IMF Working Papers, May 1, 2005
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- Inflation Targeting and Output Growth: Empirical Evidence for the European Union
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Bibliographic details
- Published: May 1, 2005
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451861082.001
Summary
- Paper evaluates performance of two alternative policy rules: a forward-looking rule and a spontaneous adjustment rule.
- Evaluation is conducted under alternative inflation targets, measured in terms of output losses in a macroeconomic model, using European Union data.
- Main simulation findings:
- Forward-looking rules contribute to macroeconomic stability and monetary policy credibility.
- A positive inflation target, as opposed to zero inflation, leads to higher and less volatile output.
- Results are robust to changes in the specification of the model and time period.
- Applying the same methodology to individual countries supports country-specific flexible inflation targeting.
Key findings and implications
- Findings:
- Forward-looking monetary policy rules improve macroeconomic stability.
- Positive inflation targets outperform zero inflation for output level and volatility.
- Country-level application supports flexible, country-specific inflation targeting.
- Policy implications:
- Consider adopting forward-looking monetary policy rules to enhance credibility and stability.
- Maintain a positive inflation target rather than aiming for zero inflation to support higher and less volatile output.
- Allow flexibility for country-specific inflation-targeting frameworks within the European Union context.
Methodology
- Uses a macroeconomic model to simulate output losses under alternative policy rules and inflation targets.
- Comparative analysis includes robustness checks across model specifications and time periods.
- Methodology is also applied to individual countries for country-specific evaluation.