Does Inflation Targeting Affect the Dispersion of Inflation Expectations?

Authors


  • We are grateful to two anonymous referees as well as the editor, Pok-sang Lam, for many valuable comments. We thank Stephen G. Cecchetti, Daniel Chiquiar, Alejandro Díaz de León, Alberto Torres, and seminar participants at Banco de México and the Centre for Central Banking Studies at the Bank of England for helpful comments. Gabriel López-Moctezuma provided outstanding research assistance. The opinions in this paper correspond to the authors and do not necessarily reflect the point of view of Banco de México.

Abstract

In this paper, we examine the effect of having an inflation targeting framework on the dispersion of inflation forecasts from professional forecasters. We use a panel data set of 25 countries—including 14 inflation targeters—with 16 years of monthly information. We find that the dispersion of long-run inflation expectations is smaller in targeting regimes after controlling for country-specific effects, time-specific effects, the level and the variance of inflation, disinflation periods, and global inflation. On average, the full effect is not observed until the third year after implementation of inflation targeting. When we differentiate between developed and developing countries, the dispersion of inflation expectations after inflation targeting is smaller and statistically significant only in developing countries.

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