Does Inflation Targeting Matter?
Laurence Ball and Niamh Sheridan
The performance of inflation-targeting regimes has been quite good. In- flation-targeting countries seem to have significantly reduced both the rate of inflation and inflation expectations beyond that which would likely have occurred in the absence of inflation targets.
The U.K. data show that not only has inflation been lower since infla- tion targeting was introduced, but that, as measured by its standard de- viation, it has also been more stable than in recent decades. Moreover, inflation has been less persistent—in the sense that shocks to inflation die away more quickly—under inflation targeting than for most of the past century.
One of the main benefits of inflation targets is that they may help to “lock in” earlier disinflationary gains, particularly in the face of one- time inflationary shocks. We saw this effect, for example, following the exits of the United Kingdom and Sweden from the European Exchange Rate Mechanism and after Canada’s 1991 imposition of the Goods and Services Tax. In each case, the re-igniting of inflation seems to have been avoided by the announcement of inflation targets that helped to anchor the public’s inflation expectations and to give an explicit plan for and di- rection to monetary policy.