Performance of Inflation Targeting: An Evaluation
The last chapter is concerned with the performance of inflation targeting countries. Specifically, we try to find out whether there is any connection between the use of sterilised foreign exchange interventions and the performance of a central bank (this is point 6 of our subjects of inquiry). This will be done by calculating different types of loss functions across countries over time. Surely, since the period under investigation is rather short, the results need to be interpreted with care.
KeywordsInterest Rate Monetary Policy Loss Function Central Bank Inflation Target
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- 160.See e.g. several contributions in Federal Reserve Bank of Kansas City (1996).Google Scholar
- 161.The relative weight may be different across countries and is not known. Svensson (2002a) argues that central banks should specify explicit loss functions and publish them in order to become more transparent.Google Scholar
- 162.See Svensson, 2002a.Google Scholar
- 163.A further explanation for interest rate smoothing behaviour is that central banks who control short-term money market rates try to influence 3-month and 6-month interest rates, which are more important for output and price developments than overnight interest rates. Since such longer term rates are also influenced by market expectations, the smoothing of interest rates contributes to keeping these rates on the same path as the short-term rates (Goodfriend, 1991). Svensson (2001d) does not find these arguments convincing except in countries with an “exceptionally weak financial sector.” (p. 46).Google Scholar
- 164.Admittedly, this stems from the loss in 1993 which is caused by the large interest rate reduction after the Pound Sterling left the EMS. The same holds true for Sweden where the fixed exchange rate was also abandoned in late 1992.Google Scholar
- 165.See e.g. Reserve Bank of New Zealand, 2001.Google Scholar