## Inflation Targeting and the Unemployment-Inflation Trade-off

_IMF Working Papers, October 1, 2001_

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## Bibliographic details
- Authors: Chorng-Huey Wong, Eric V. Clifton, Gene L. Leon
- Published: October 1, 2001
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451858105.001

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### Summary and Main Finding
- 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.

### Methodology
- Empirical approach: smooth transition regression models.
- Sample: OECD countries adopting inflation targeting (as described in the paper).

### Theoretical Implications
- Credibility-enhancing adoption of inflation targeting is predicted to improve the unemployment-inflation trade-off.
- Improvement is gradual and linked to the process of establishing central bank credibility rather than immediate upon adoption.

### Policy Implications and Interpretation
- Adoption of inflation targeting can lead to better disinflation outcomes (lower inflation with smaller increases in unemployment) over time.
- Policymakers should consider the time path of credibility formation when assessing the benefits of inflation-targeting regimes.

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## Content in this bundle

- **Inflation Targeting and the Unemployment-Inflation Trade-off -WP/01/166**
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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/inflation-targeting-and-the-unemployment-inflation-trade-off-15416_