Inflation targeting as a shock absorber.

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Publisher: Elsevier Science Publishers
Document Type: Report; Brief article
Length: 169 words

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Abstract :

Keywords Monetary policy; Central banks; Inflation targeting; Inflation; Natural disasters Abstract We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard, but not soft, targeting reaps the rewards: deeds, not words, matter for successful monetary stabilization. Author Affiliation: (a) DIW Berlin, Mohrenstraße 58, 10117 Berlin, Germany (b) Banque de France, 31 rue Croix des Petits-Champs, 75001 Paris, France * Corresponding author. Article History: Received 4 April 2018; Revised 29 January 2020; Accepted 29 January 2020 Byline: Marcel Fratzscher [mfratzscher@diw.de] (a), Christoph Grosse-Steffen [christoph.grossesteffen@banque-france.fr] (b,*), Malte Rieth [mrieth@diw.de] (a)

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Gale Document Number: GALE|A616909495