Does Inflation Targeting Make a Difference? Rick Mishkin and Klaus Schmidt-Hebbel Comments by Andrew Powell RES, IDB

Mishkin-S. Hebbel As is to be expected, this is a very well- argued and comprehensive paper. Represents the state of the art in terms of testing IT performance.

The Paper 1. The state of the debate –IT’ers do well but so do NIT’ers 2. Descriptive inflation and output statistics –“stationarity” of the inflation target 3. Comparative inflation performance –IT lowers inf.0.5% pa, but not significant against NIT’ers 4. Inflation and policy response to shocks –IT lowers response to oil and Xrate shocks (PVAR) 5. Inflation volatility, output volatility and monetary policy efficiency –IT enchances efficiency frontier, output, inf volatility 6. Inflation accuracy –IT’ers misses are lower than NIT’ers inf volatility 7. Concluding remarks

Plan of the Discussion Specific Comments on the Paper General problems regarding whether testing whether IT works What is IT? And some thoughts regarding “testing”

Some specific comments on the paper On Stationarity of the Target Comparative performance: –Expect inflation to be lower in IT’ers –but at what sacrifice? Reaction to shocks –Is Choleski identification appropriate? –The order indicates the exchange rate is the most endogenous but then analyse IR’s wrt exchange rate IT’s miss less than NIT’ers are volatile, and? Most interesting is monetary policy efficiency –But, across a very homogenous group of countries

Some Problems Testing IT IT is not a uniform/homogenous regime Benefits versus Sacrifices Endogeneity –Countries that want to lower inflation adopt, but is it, IT that lowers inflation? –Do Independent C.B. countries adopt IT or do countries adopt IT to get an Independent CB?

On Homegeneity New Zealand –Strict(‘ish) IT UK –“Spot the shock” IT - Haldane Mexico –IT as communication/marketing - Werner Doubts on results regarding country groups?

On Endogeneity: 3 General Motivations A belief that greater transparency might aid a disappointing economic performance –New Zealand, Canada, Australia, Mexico Greater flexibility in exchange rate movements after obtaining deflation using a fixed X. rate –Israel, Chile, Spain Regain credibility after a crisis –Brazil, Sweden, UK

Why not IT? 3 General Motivations Large closed economies don’t need IT? –US, Euroland, Japan Others may not wish to be saddled with any commitment? Others dont want/cannot have an independent monetary policy? Or prefer other commitment. IT is a way for small, open economies to strive to obtain some independence in monetary policy...

What is the underlying model, what should we be testing? Under what conditions is targeting P different to targeting, say, M? –What countries satisfy those conditions? –We have OCA, what about O.IT? How does monetary policy work in different country environments?