Inflation Targeting and Monetary Policy : An Econometric Analysis of 7 OECD Countries and the Eurozone
This doctoral thesis comprises a study of three aspects of inflation targeting and monetary policy in 7 OECD countries that were the first to introduce inflation targeting as well as the U.S. and the Eurozone who do not pursue an explicit inflation targeting strategy. The first chapter finds that transparency which often has accompanied the inflation targeting strategy of central banks has not helped the private sector to better predict the future policy interest rate. Furthermore, no significant improvement was observed after inflation targeting was introduced. The private sector’s forecast of the policy rate is better in the non-inflation targeting countries. By estimating the Taylor using GMM in chapter two, it can be shown that most of the inflation targeting countries do not focus more on controlling inflation than they focus on decreasing the output gap- which is what one would expect to find. The exception is New Zealand who seems to be the only country to run a “hard core” inflation targeting strategy. The estimated coefficients show that most of the inflation targeting countries have been focusing roughly equally on promoting output and controlling inflation and in some cases even more on stimulating output then on controlling inflation. This brings attention to the arguments of two famous monetary policy economists i.e. Svensson and Taylor. Taylor blames the house price bubble in the U.S. on too loose monetary policy. Svensson argues that monetary policy is not to blame but, instead, financial under-regulation is. After investigating both arguments empirically it is possible to conclude that even though loose monetary policy created the foundation of extensive house price increases, it is the lack of regulation in the financial sector that caused the global financial crisis.