Inflation Targeting and the Unemployment-Inflation Trade-off

By Chorng-Huey Wong, Eric V. Clifton, Gene L. Leon

October 1, 2001

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Chorng-Huey Wong, Eric V. Clifton, and Gene L. Leon Inflation Targeting and the Unemployment-Inflation Trade-off, (USA: International Monetary Fund, 2001) accessed November 24, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper examines the impact of the introduction of inflation targeting on the unemployment-inflation trade-off in OECD countries. Theoretical models suggest that the credibility-enhancing effects of the adoption of inflation targeting should cause an improvement in the unemployment-inflation trade-off, i.e., that reducing inflation by a given amount should occur with a smaller rise in unemployment. The empirical evidence examined for OECD countries adopting inflation targeting supports this hypothesis. Using a smooth transition regression model, it is shown that the improvement in this trade-off does not take place immediately after the adoption of inflation targeting; rather, it improves over time as the credibility of the central bank is established.

Subject: Disinflation, Inflation, Inflation targeting, Labor, Monetary policy, Prices, Unemployment, Unemployment rate

Keywords: Credibility, Disinflation, Inflation, Inflation expectation, Inflation targeting, IT country, Monetary policy, Output-inflation trade-off, Phillips curve, Smooth transition regression models, Unemployment, Unemployment rate, Unemployment-inflation relationship, Unemployment-inflation trade-off, WP

Publication Details

Pages:

43
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2001/166
Stock No:

WPIEA1662001
ISBN:

9781451858105
ISSN:

1018-5941

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