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July/August 2004, 
Vol. 86, No. 4
Posted 2004-07-01

The Macroeconomic Effects of Inflation Targeting

by Andrew T. Levin, Fabio M. Natalucci, and Jeremy M. Piger

The authors attempt to assess on empirical grounds whether inflation targeting has made a difference for economic performance. In the tradition of the existing literature on this topic, the authors ask whether the economic performance of a group of countries that have adopted inflation targeting differs substantially from a group of countries that have not. The authors first investigate whether the data are consistent with the claim that inflation expectations are anchored by inflation targeting. Using private sector inflation forecasts for industrial countries obtained from surveys, the authors find that the unconditional volatility of these inflation forecasts is not noticeably different between inflation targeting and non-inflation-targeting economies. The authors do find, however, that the source of volatility does seem to differ. In particular, they find that for non-inflation-targeting economies, long-run inflation forecasts exhibit a highly significant correlation with past realized inflation.