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Band or point inflation targeting? An experimental approach.

Authors :
Cornand, Camille
M’baye, Cheick Kader
Source :
Journal of Economic Interaction & Coordination; Jul2018, Vol. 13 Issue 2, p283-309, 27p
Publication Year :
2018

Abstract

We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small uncorrelated shocks, the level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large uncorrelated shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks. [ABSTRACT FROM AUTHOR]

Details

Language :
English
ISSN :
1860711X
Volume :
13
Issue :
2
Database :
Complementary Index
Journal :
Journal of Economic Interaction & Coordination
Publication Type :
Academic Journal
Accession number :
130167437
Full Text :
https://doi.org/10.1007/s11403-016-0183-y