inflation_get - MARCH/APRIL 1999 Pierre L Siklos is...

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1 See, for example, Berg and Jonung (1998) for the Swedish experience with price- level targeting during the 1930s. In the United States, there have been many attempts to reform the Federal Reserve Act to mandate some form of inflation control. In the 1920s, congressional bills that would have made price stability the target for the Fed failed, as did several bills introduced in the 105th Congress (1997). 2 See Haldane (1995), Leiderman and Svensson (1995), Laidler (1997), Mishkin and Posen (1997), Bernanke, Laubach, Mishkin and Posen (1999), and the Federal Reserve Bank of Kansas City (1996) for comprehensive overviews. F EDERAL R ESERVE B ANK OF S T . L OUIS 47 M ARCH /A PRIL 1999 Inflation- Target Design: Changing Inflation Performance and Persistence in Industrial Countries Pierre L. Siklos F inding a monetary regime that can deliver some form of price stability, as well as satisfactory economic perfor- mance, always has been explained more convincingly in theory than in practice. Consequently, governments have, over time, experimented with policies ranging from some metallic standard (for example, gold, silver, or bimetallic) to various forms of exchange rate pegging (for example, Bretton Woods or the European exchange rate mechanism) and the introduction of currency boards (as in Hong Kong, Argentina, or Estonia, for example). The latest fashion in monetary policy formula- tion is a renewed interest in inflation targeting. 1 The policy has attracted the attention of policymakers and the public alike. Although imperfect, inflation targeting seemingly lacks some of the drawbacks of other policy regimes. The rationale for inflation targeting and the ingredients of an inflation-targeting policy are reviewed briefly in the following two sections. 2 There has, however, been relatively less emphasis placed on compar- ative assessments of inflation performance under inflation targeting among the group of countries that have formally adopted the policy. Does inflation targeting influence the time series properties of inflation? To explore this issue, I estimate a simple model that illustrates whether inflation persistence has changed in a significant fashion in inflation targeting vs. non inflation-targeting countries. The paper concludes by noting that it is too early for a definitive assessment of inflation targeting. Yet, from the stand- point of economic analysis and empirical performance to date, a policy of inflation control offers as good a chance as any policy regime to produce consistently good macroeconomic performance. THE DESIGN OF INFLATION TARGETS The Bretton Woods era of pegged exchange rates was notable for the absence of large international economic shocks (Bordo, 1993). When these did take place, most industrial countries eventually allowed their currencies to float vis-à-vis the U.S.
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