Inflation Targeting as a Shock Absorber

Aufsätze referiert extern - Web of Science

Marcel Fratzscher, Christoph Große Steffen, Malte Rieth

In: Journal of International Economics 123 (2020), 103308, 16 S.


We study the characteristics of inflation targeting as a shock absorber, using quarterly data for a large panel of countries. To overcome an endogeneity problem between monetary regimes and the likelihood of crises, we propose to study large natural disasters. We find that inflation targeting improves macroeconomic performance following such exogenous shocks. It lowers inflation, raises output growth, and reduces inflation variability compared to alternative monetary regimes. This performance is mostly due to a different response of monetary policy and fiscal policy under inflation targeting. Finally, we show that only hard, but not soft, targeting reaps the rewards: deeds, not words, matter for successful monetary stabilization.

Malte Rieth

Research Associate in the Macroeconomics Department

JEL-Classification: E42;E52;E58;F41;Q54
Keywords: Monetary policy, Central banks, inflation targeting, inflation, natural disasters