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Inflation Targets as a Stabilization Device

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  • Lavan Mahadeva
  • Gabriel Sterne

Abstract

We highlight important aspects and consequences of using inflation targets during disinflation. Our illustrative theoretical model suggests annual revisions to short run are larger when the target is undershot than when the target is overshot. We confirm the result using cross–country panel estimates from a unique data set of inflation target misses in 60 countries in the 1990s. During disinflation the decision to change the target and policy instrument may sometimes be difficult to separate. Such short–term targets may be more akin to conditional forecasts than policy rules, but their publication nevertheless increases transparency and hence helps policymakers to achieve lower inflation.

Suggested Citation

  • Lavan Mahadeva & Gabriel Sterne, 2002. "Inflation Targets as a Stabilization Device," Manchester School, University of Manchester, vol. 70(4), pages 619-650, June.
  • Handle: RePEc:bla:manchs:v:70:y:2002:i:4:p:619-650
    DOI: 10.1111/1467-9957.00303
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