The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel

Inflation targets were introduced in the 1990s in Australia, Canada, New Zealand, Sweden and the United Kingdom. Change in the behavior of expected inflation in the five targeting countries is measured in a panel that includes six non-targeting countries: France, Germany, Italy, the Netherlands, Japan and the United States. The level of expected inflation in targeting countries falls after the announcement of targets with controls for country effects, year effects, ongoing inflation reduction and the business cycle. Neither the variability of expected inflation nor the average absolute forecast error falls after the announcement of targets with controls for the level and variability of past inflation. Both targeting and non-targeting countries experience unexpected disinflation. (C) 2002 Elsevier Science B.V. All rights reserved.