Band or Point Inflation Targeting? An Experimental Approach

Camille Cornand and Cheick Kader M'baye
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Cheick Kader M'baye: University of Bamako, Bamako, Mali

No 1616, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

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 shocks, the average 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 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 (search for similar items in EconPapers)
JEL-codes: C91 C92 E52 E58 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-dge, nep-exp, nep-mac and nep-mon
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Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Band or point inflation targeting? An experimental approach (2018)
Working Paper: Band or point inflation targeting? An experimental approach (2018)
Working Paper: Band or Point Inflation Targeting? An Experimental Approach (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:gat:wpaper:1616

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