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

the effect of inflation targets on the level of expected inflation in five countries did inflation targets reduce the level of expected inflation in australia canada new zealand sweden and the united kingdom in this note predictions of forecasts by professional forecasters are constructed for five consecutive 12 month periods after the announcement of targets these predictions use a variety of information variables known to forecasters at the time they make their forecasts the results show that after the announcement of targets predicted forecasts are less than actual forecasts in australia canada new zealand and sweden this is evidence that targets reduced the level of expected inflation no evidence of such effects is found in the united kingdom

does inflation targeting affect the dispersion of inflation expectations 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

measurement estimation and comparison of credit migration matrices abstract credit migration matrices are cardinal inputs to many risk management applications their accurate estimation is therefore critical we explore two approaches cohort and two variants of duration one imposing the other relaxing time homogeneity and the resulting differences both statistically through matrix norms and economically using a credit portfolio model we propose a new metric for comparing these matrices based on singular values and apply it to credit rating histories of s p rated us firms from 1981 2002 we show that the migration matrices have been increasing in size since the mid 1990s with 2002 being the largest in the sense of being the most dynamic we develop a testing procedure using bootstrap techniques to assess statistically the differences between migration matrices as represented by our metric we demonstrate that it can matter substantially which estimation method is chosen economic credit risk capital differences implied by different estimation techniques can be as large as differences between economic regimes recession vs expansion ignoring the efficiency gain inherent in the duration methods by using the cohort method instead is more damaging than imposing a possibly false assumption of time homogeneity

industrial composition interindustry effects and the u s productivity slowdown this paper investigates the effect of shifts in output composition on the slowdown of productivity growth in the united states between 1947 67 and 1967 76 i employ a leontief input output framework and a divisia index of aggregate productivity growth to separate the effects of changes in sectoral rates of technical progress from the effects of changes in output composition and interindustry flows on the change in overall productivity growth of the approximately 2 percentage point decline in overall total factor productivity growth 17 to 22 was due to compositional effects and the remainder to other factors t he importance of shifts in input or output composition in explaining the recent productivity slowdown in the united states has been a source of some controversy estimates of such shift effects vary considerably for example gollop 1982 calculated that resource shifts were actually an offset to the slowdown in productivity growth kutscher mark and norsworthy 1977 estimated that employment shifts had no effect on productivity growth thurow 1979 ascribed half of the slowdown between 1965 72 and 1972 77 to employment shifts and nordhaus 1972 attributed 77 of the decline from 1948 55 to 1965 71 to employment shifts in a related paper the possible reasons for these disparate results were discussed at length see baumol and wolff forthcoming briefly these differences stem primarily from the use of different concepts and measures actually three different concepts are used in the literature the first is a resource allocation or equilibrating shift effect which measures the increase in productivity that can result from a more efficient allocation of resources cf denison 1979a 1979b and 1984 norsworthy harper and kunze 1979 and gollop 1982 while interesting in itself this resource reallocation effect is a somewhat limited notion measuring the movement toward the efficient frontier instead of the outward movement of the frontier over time the second concept is the so called level effect which assesses the effect of resource shifts on overall productivity growth by holding constant the productivity levels of the various sectors of the economy cf nordhaus 1972 kutscher mark and norsworthy 1977 and thurow 1979 this measure was found to be quite arbitrary depending on the arbitrary choice of base year used in the computation the third is the so called rate effect which assesses the effect of shifts in resources by holding constant sectoral rates of productivity growth cf nordhaus 1972 baily 1982 and gollop 1982 all three authors found that the rate effect had a negligible influence on the productivity slowdown this measure is the most theoretically sound of the three and my measure will fall in this category though differ in significant ways from previous formulations and show a greater effect on overall productivity growth from compositional changes i shall first develop a general model to measure such shifts or composition effects from a leontief input output framework sections i and ii results for the u s economy over the 1947 76 period will then be reported with particular emphasis on accounting for the productivity slowdown after 1967 sections iii iv and v conclusions and a comparison with other results will be discussed in section vi vii and viii i the standard model following the work of peterson 1979 let us define x column vector of gross output by sector at time t y column vector of final demand by sector at time t at matrix of inter industry technical coefficients at time t it row vector of labor coefficients at time t showing employment per unit of output kt row vector of capital stock coefficients at time t showing the capital stock required per unit of output p row vector of prices at time t showing the price per unit of output of each industry received for publication june 27 1983 revision accepted for publication october 19 1984 new york university i would like to express my appreciation to wassily leontief william baumol m i nadiri mark schankerman martin baily and andrew sharpe for helpful comments and to the division of information science and technology of the national science foundation for financial support

how do exchange rates co move a study on the currencies of five inflation targeting countries abstract this paper does three things first it explores the type of asymmetry in exchange rate correlation for five inflation targeting countries we show their currencies co move more closely with the currencies of some influential foreign countries during joint appreciations than joint depreciations against a world currency second it establishes empirically the linkage between interest rate differentials and exchange rate correlation we find evidence that both widening and narrowing interest rate differentials will reduce the correlation third it proposes a new version of the asymmetric dynamic conditional correlation model the model proves to be capable of providing great insight into the two issues investigated

bank behavior based on internal credit ratings of borrowers abstract this study examines the relation of bank loan terms to borrower risk defined by the banks internal credit rating the analysis is not restricted to a static view it also incorporates rating transition and its implications on the relation money illusion and phenomena linked with relationship banking are discovered as important factors the results show that riskier borrowers pay higher loan rate premiums and rely more on bank finance housebanks obtain more collateral and provide more finance caused by money illusion in times of high market interest rates loan rate premiums are relatively small whereas in times of low market interest rates they are relatively high there was no evidence for an appropriate adjustment of loan terms to rating changes

inflation targeting and relative price variability what difference does inflation targeting make author affiliation chi young choi cychoi uta eduyoung se kim acknowledgment the authors are grateful to coeditor kent kimbrough and two anonymous referees for constructive comments that helped to improve this article the authors also wish to thank steve cecchetti kang liu shin ichi nishiyama margie tieslau taka tsuruga and the seminar participants at the academia sinica national chung cheng university national sun yat sen university national taiwan university texas tech university and the university of texas at arlington for helpful comments and vikas kakkar for providing cpi data for hong kong any remaining errors are the authors 1 introductionvariability in relative prices is known to be a major channel through which inflation can induce welfare costs by impeding an efficient allocation of resources in the economy consequently substantial effort has been devoted in the literature to examining the link between relative price variability rpv and aggregate inflation although much of the existing theoretical and empirical literature points to a positive monotonic relationship newer contributions suggest that the relationship between inflation and rpv is more complicated particularly in terms of its sensitivity to the inflation regime 1the primary purpose of this study is to investigate whether the connection between inflation and rpv is influenced in an important way by the monetary policy framework chosen by a central bank specifically this article focuses on exploring whether the adoption of an inflation targeting it framework exerts any significant impact on rpv as measured by the standard deviations of sectoral inflation rates relative to the aggregate rate since it was first implemented in new zealand more than two decades ago the popularity of it has spread with some twenty five countries worldwide implementing the framework to date freedman and laxton 2009 the literature is now replete with studies pointing to reductions in both the level and the volatility of inflation in countries that have adopted it e g mishkin and schmidt hebbel 2007 2 while studies of the impact of it on aggregate inflation performance are plentiful little attention has been paid to the impact of it on rpv the question of whether and indeed how it affects rpv is an important one for several reasons first exploring the potential connection between it and rpv is a worthwhile exercise given the popularity of it as a monetary framework and the centrality of rpv to the current generation of macromodels the importance of rpv is recognized in standard new keynesian dynamic stochastic general equilibrium dsge models where the variance of relative prices is viewed as a useful summary statistic as noted by amano ambler and rebei 2007 for example in dsge models the optimal rate of target inflation and the optimal variability of inflation relative to output depend on the quantitative effects of price dispersion on macroeconomic equilibrium second answering the question helps us identify the driving force behind the change in rpv distinguishing between it adoption itself and its subsequent impact on inflation if the relationship is monotonically positive as is often believed in the literature one should expect that it adoption would bring about a decline in rpv in the same way as it has led to a decline in inflation if the relationship is more complex however the effect of it adoption on reducing rpv may hinge on the change in inflation regimes after it adoption third our answer to the question also sheds additional light on the empirical evidence for the relative effectiveness of it across different stages of development while there is strong evidence that developing countries benefit more from it than industrial countries in combating inflation and its volatility e g petursson 2004 lin and ye 2009 we are aware of no empirical research that has assessed this issue with respect to rpv

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

mesures de la croissance de la productivite dans un cadre d equilibre general l economie du quebec entre 1978 et 1984 the authors propose a new measure of total factor productivity tfp growth in a general equilibrium setting it measures by how much the efficiency frontier moves outwards given the availability of primary resources the technology and the structure of domestic final demand prices are endogenous the authors apply this new measure to the quebec economy between 1978 and 1984 they find negative tfp growth rates in most of the manufacturing industries and positive and relatively high growth rates in the service sectors aggregate annual tfp growth was 1 1 percent over this period

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

inflation targeting an indirect approach to assess the direct impact it is quite difficult to assess the benefits of inflation targeting it since its immediate effect will be on inflation expectations an unobserved variable due to lack of comprehensive data on inflation expectations most studies so far concentrated on the impact of it either on observable variables like output unemployment and inflation or compared post it surveys of itcountries with nonit countries in our study we focus on a yet unanswered question i e how the expectations change with the adoption of it we suggest that heterogeneous inflation expectations lead to long memory in actual inflation and it if successful should decrease this persistence by concentrating the public s expectations toward the announced target empirical results confirm our hypothesis with a reduction in inflation memory after the adoption of it in almost all eight developed countries in our sample

does inflation targeting anchor long run inflation expectations evidence from the u s uk and sweden we investigate the extent to which inflation expectations have been more firmly anchored in the united kingdom a country with an explicit inflation target than in the united states a country with no such target using the difference between far ahead forward rates on nominal and inflation indexed bonds as a measure of compensation for expected inflation and inflation risk at long horizons we show that far ahead forward inflation compensation in the u s exhibits substantial volatility especially at low frequencies and displays a highly significant degree of sensitivity to economic news similar patterns are evident in the uk prior to 1997 when the bank of england was not independent but have been strikingly absent since the bank of england gained independence in 1997 our findings are further supported by comparisons of dispersion in longer run inflation expectations of professional forecasters and by evidence from sweden another inflation targeting country with a relatively long history of inflation indexed bonds our results support the view that an explicit and credible inflation target helps to anchor the private sector s views regarding the distribution of long run inflation outcomes jel e31 e52 e58

inflation targeting and output inflation tradeoffs abstract this article assesses whether the adoption of inflation targeting it helps reduce the output inflation tradeoff we address the self selection problem of it policy adoption by the endogenous switching regressions and show that the output inflation tradeoffs are significantly lower in it countries not only over the whole sample but also across the developed and developing country subsamples in addition we also find strong evidence supporting the positive selection hypothesis i e countries have higher probability of adopting it are exactly those who benefit more larger reduction of output inflation tradeoff from the implementation of it additional results reveal that economies with higher trade openness lower financial openness and less flexible exchange rate regime are associated with larger tradeoff between output and inflation but the effects are only statistically significant in the it regime

inflation targeting genuine effects or publication selection bias abstract this paper uses a meta regression analysis mra to evaluate the impact of publication selection bias as for the macroeconomic effects of inflation targeting it a popular approach to implementing monetary policy documented in the existing literature using 8 059 point estimates from 113 studies we show that a significant part of the documented positive effects of it on inflation and to some extent output growth volatility is in fact due to publication selection bias in particular results pointing to lower inflation volatility and higher real gdp growth tend to be favored by researchers as well as those pointing to statistically significant macroeconomic effects however even after controlling for these two types of biases we find it to be correlated with lower inflation and higher real gdp growth differently the evidence on the it inflation volatility relationship is found to be less clear

on the credibility of inflation targeting regimes in latin america inflation targeting has been adopted in a set of emerging economies including eight countries in latin america the success of this regime may depend critically on the credibility of the target and the expectation that the authorities will take appropriate actions if the target is breached this paper exploits a database of inflation expectations and attempts to measure whether for a set of inflation targeters in latin america expectations are well anchored a tighter anchoring of expectations is interpreted as a gain in credibility also considered are the effects on the credibility of the regime if the inflation target is breached the results indicate that while inflation expectations have not been fully anchored over the whole sample period credibility has risen but at the same time the cost of breaching the target has grown

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

how have inflation targeting central banks responded to supply shocks abstract this paper examines how inflation targeting central banks have responded to supply shocks based on the sign restriction var approach it is found that inflation targeting central banks have become accommodative to adverse supply shocks following the adoption of inflation targeting

estimation of rating class transition probabilities with incomplete data abstract this paper shows that the well known duration and cohort methods for estimating transition probabilities of external bond ratings are not suitable for internal rating data more precisely the duration method cannot and the cohort method should not be used in connection with banks ratings generated from internal models structural differences within the borrower monitoring process of banks and rating agencies are responsible for this result a maximum likelihood ml estimation procedure which accounts for the peculiarities of internal bank ratings is introduced and applied to data from a german bank the empirical results indicate that the differences between cohort and ml transition matrices are both statistically and economically significant furthermore evidence of rating reversals business cycle dependent transition probabilities and on the factors which determine the borrower monitoring intensity of banks is provided

does inflation targeting really make a difference evaluating the treatment effect of inflation targeting in seven industrial countries abstract we evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s to address the self selection problem of policy adoption we make use of a variety of propensity score matching methods recently developed in the treatment effect literature our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries further evidence from long term nominal interest rates and income velocity of money also supports the window dressing view of inflation targeting

does inflation targeting make a difference in developing countries we evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004 using a variety of propensity score matching methods we show that on average inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries however the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous the performance of a given inflation targeting regime can be affected by country characteristics such as government s fiscal position central bank s desire to limit the movements of exchange rate its willingness to meet the preconditions of policy adoption and the time length since the policy adoption

re evaluating the effectiveness of inflation targeting abstract this paper estimates the treatment effect of inflation targeting on macroeconomic variables using a semiparametric single index method by taking into account the model misspecification of parametric propensity scores our study uses a broader set of preconditions for inflation targeting and macroeconomic outcome variables than the existing literature the results suggest no significant difference in the inflation level and inflation volatility between targeters and non targeters after the adoption of inflation targeting we find that inflation targeting reduces sacrifice ratio and interest rate volatility in the developed economies and that it enhances fiscal discipline in both the industrial and developing countries

testing the transparency benefits of inflation targeting evidence from private sector forecasts abstract using inflation forecast data for 11 it adoption countries it adoption is found to promote convergence in forecast errors suggesting that it enhances transparency this result which is subjected to several robustness checks and found to be robust 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

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

announcements and credibility under inflation targeting abstract we inspect how inflation target announcements are instrumental in building central bank credibility and shaping inflation expectations investigating the role of announcements by using a time varying credibility measure we find that both the accuracy and the frequency of inflation announcements have a positive impact on how much attention the public pays to target announcements

the first year of the eurosystem inflation targeting or not this paper is a brief evaluation of the eurosystem s monetary policy regime after its first year in particular of the extent to which it is similar to inflation targeting as practiced by an increasing number of central banks i examine the eurosystem s goals framework for monetary policy decisions and communication with outsiders criteria for evaluation are whether the goals are unambiguous and appropriate whether the decision framework is efficient in collecting and processing information and reaching decisions that are appropriate relative to the goals and whether the communication is effective in motivating decisions simplifying external evaluation and thereby improving transparency and accountability i also consider whether the actual instrument setting has been appropriate given the informaion available at the times of decision