Does inflation targeting matter for output and inflation volatility?

• Authors: Luca Gambetti.
• BSE Working Paper: 410 | September 15
• Keywords: inflation targeting , conditional moments , markup shocks , new policy trade-off , policy ratio , SVAR , trade-off ratio
• JEL codes: E31, E42, E58
• inflation targeting
• conditional moments
• markup shocks
• new policy trade-off
• policy ratio
• SVAR
• trade-off ratio

We address this question by examining the conditional dynamics of inflation and output growth in response to markup shocks for 14 industrialized countries. Markup shocks create a trade-off between output gap and inflation stabilization purposes, and the theory predicts that conditional on such shocks output growth should be more volatile than inflation in inflation targeting countries. Data suggest no differences between targeting and non-targeting countries in the post 1990s. Moreover, we document a similar increase in the conditional relative variability of output growth after the adoption of inflation targeting for both groups of countries. We argue that changes in the conduct of monetary policy can explain this pattern.