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Business cycle synchronization: is it affected by inflation targeting credibility?

Author

Listed:
  • Carlos Delgado

    (Universidad de Concepción)

  • Iván Araya

    (Universidad de Concepción)

  • Gabriel Pino

    (Universidad de Talca)

Abstract

We empirically study the impact of inflation targeting credibility on business cycle synchronization with G-7 economies. To do this, we use a sample of 15 inflation targeting countries to develop and calculate a reputation-based credibility measure for long- and short-term memory. By using dynamic multipliers through a panel vector autoregressive model, our main findings indicate that greater credibility allows for greater anchoring of inflation expectations by economic agents. This would lead to a greater effectiveness of monetary policy in stabilizing the evolution of prices, allowing the output gap to be more sensitive to external aggregate demand shocks. Therefore, countries with inflation targeting regimes must develop and maintain credibility for their monetary policy if they want to encourage greater interactions with the rest of the world.

Suggested Citation

  • Carlos Delgado & Iván Araya & Gabriel Pino, 2020. "Business cycle synchronization: is it affected by inflation targeting credibility?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 11(2), pages 157-177, June.
    • Handle: RePEc:spr:series:v:11:y:2020:i:2:d:10.1007_s13209-019-00206-z
    DOI: 10.1007/s13209-019-00206-z
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    References listed on IDEAS

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    More about this item

    Keywords

    Business cycle synchronization; Credibility; Globalization; Inflation targeting; Panel VAR;
    All these keywords.

    JEL classification:

    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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