Does inflation targeting matter in industrialized countries?

Abstract

After it was first adopted by the New Zealand in 1989, inflation targeting (IT) has became quite popular and several other countries have started to design their monetary policy strategies within the IT framework. In the literature, there are considerable amount of studies which discuss the underlying reasons of the popularity of IT and several of them come up with the conclusion that the increased macroeconomic performance of 1990s is attributable to the IT regime. In this thesis, we will try to discover the differing characteristics of the IT and non-IT countries in terms of their revealed aversion to inflation variability which is proposed in Cecchetti and Ehrmann (2000) (CE). Furthermore, we will investigate whether the path followed by the inflation in the aftermath of a demand shock for IT and non-IT countries are different from each other. All measures which we will be analyzed in this thesis will be estimated from a semi-structural dynamic time series model using extended Kalman filtering techniques.