Volatility costs of inflation targeting : analysis of nine inflation targeting countries

Abstract

This thesis tries to investigate the impact of inflation targeting as a monetary policy on the volatility of output and inflation, interest rate, exchange rate, and money growth in the nine countries that adopted inflation targeting prior to 1994: Australia, Canada, Chile, Finland, Israel, New Zealand, Spain, Sweden and United Kingdom. The thesis also compares four inflation targeting countries to noninflation-targeters to figure out the relative effectiveness of inflation targeting as a monetary policy. Structural break tests are made on the monetary aggregates. The main finding of the thesis is, inflation targeting countries well managed to improve their performance in terms of the volatilities of monetary aggregates. Despite the fact that there are upward movements in the volatilities of monetary aggregates at the time of the regime shift, after the adoption of inflation targeting, in general, the volatilities declined. However, there isn’t any clear pattern of how inflation targeting countries perform relative to the benchmark countries.