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Testing the Transparency Benefits of Inflation Targeting: Evidence from Private Sector Forecasts
Author:
Mr. Christopher W. Crowe
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Series:
IMF Working Papers
Volume/Issue:
Volume 2006: Issue 289
Language:
English
Publication Date:
01 Dec 2006
DOI:
https://doi.org/10.5089/9781451865493.001
ISBN:
9781451865493
ISSN:
1018-5941
Pages:
29
Keywords:
WP; central bank
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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I test whether inflation targeting (IT) enhances transparency using inflation forecast data for 11 IT adoption countries. IT adoption promotes convergence in forecast errors, suggesting that it enhances transparency. This effect is robust to dropping observations, is strengthened by using instrumental variable estimation to eliminate mean-reversion, and is absent in placebo regressions (where IT adoption is shifted by a year). This result supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund