Disagreement about Future Inflation: Understanding the Benefits of Inflation Targeting and Transparency

IMF Working Papers, January 25, 2018

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We estimate the determinants of disagreement about future inflation in a large and diverse sample of countries, focusing on the role of monetary policy frameworks.
The reduction in disagreement that follows the adoption of inflation targeting is entirely due to increased central bank transparency.
Since the benefits of increased transparency are non-linear, the gains from inflation targeting adoption have accrued mainly to countries that started from a low level of transparency. These have tended to be developing countries.

The observed reduction in disagreement about future inflation after adoption of inflation targeting (IT) arises solely from increased central bank transparency.
Benefits of increased transparency are non-linear.
Countries with low initial transparency—typically developing countries—receive the largest gains from adopting IT accompanied by transparency improvements.

Central bank transparency is the operative channel through which IT adoption reduces disagreement about future inflation.
Non-linearity implies that incremental transparency improvements matter more when starting transparency is low; countries starting with higher transparency gain less from additional transparency tied to IT adoption.

Adoption of inflation targeting should be accompanied by increases in central bank transparency to reduce disagreement about future inflation.
Prioritizing transparency reforms in developing countries—where starting transparency has tended to be low—can yield larger reductions in disagreement about future inflation.
Policymakers should account for non-linear returns to transparency when designing monetary policy framework reforms.

wp1824 — Sections 1–3
- wp1824 — Sections 1–3 (Markdown version)
- wp1824 — Sections 1–3 (PDF)