Testing the Transparency Benefits of Inflation Targeting: Evidence from Private Sector Forecasts

Author/Editor:

Christopher W. Crowe

Publication Date:

December 1, 2006

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

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:

I test whether inflation targeting (IT) enhances transparency using inflation forecast data for 11 IT adoption countries. IT adoption promotes convergence in forecast errors, suggesting that it enhances transparency. This effect is robust to dropping observations, is strengthened by using instrumental variable estimation to eliminate mean-reversion, and is absent in placebo regressions (where IT adoption is shifted by a year). This result supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.

Series:

Working Paper No. 2006/289

Subject:

Banking Economic forecasting Emerging and frontier financial markets Inflation Inflation targeting

English

Publication Date:

December 1, 2006

ISBN/ISSN:

9781451865493/1018-5941

Stock No:

WPIEA2006289

Pages:

29

Please address any questions about this title to publications@imf.org