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Band or point inflation targeting? An experimental approach

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Abstract

We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small uncorrelated shocks, the level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large uncorrelated shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks.

Keywords

Band inflation target Point inflation target Inflation expectations Monetary policy New Keynesian model Macroeconomic shocks Laboratory experiments 

JEL Classification

E58 E52 C91 C92 

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Copyright information

© Springer-Verlag Berlin Heidelberg 2016

Authors and Affiliations

  1. 1.Univ Lyon, CNRSGATE UMR 5824EcullyFrance
  2. 2.University of BamakoBamakoMali

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