Are inflation targets credible? A novel test

We propose a novel test of the credibility of inflation targets, using surveys of professional forecasters and a variant of the model of inflation expectations developed in Mehrotra and Yetman (2017). We find that inflation targets in most economies have been considered credible by professional fore...

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Bibliographic Details
Published in:Economics letters 2018-06, Vol.167, p.67-70
Main Authors: Mehrotra, Aaron, Yetman, James
Format: Article
Language:English
Subjects:
Credibility
Expectations
Forecasting
Goal setting
Inflation
Inflation expectations
Inflation targeting
Studies
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Summary:We propose a novel test of the credibility of inflation targets, using surveys of professional forecasters and a variant of the model of inflation expectations developed in Mehrotra and Yetman (2017). We find that inflation targets in most economies have been considered credible by professional forecasters, as the estimated anchor of inflation forecasts is close to the announced inflation target. Moreover, any deviations between the estimated anchor and the target tend to be short lived. •The paper proposes a novel test of the credibility of inflation targets•We compare estimated long-run anchors of inflation forecasts with announced targets•We find that professional forecasters mostly consider inflation targets credible
ISSN:0165-1765
1873-7374
DOI:10.1016/j.econlet.2018.03.015