Does Inflation Targeting Matter for Price Stability?

Since New Zealand adopted Inflation Targeting as a monetary policy in 1990, many countries have adopted inflation targeting. Due to the high accountability and high transparency of central banks under IT policy, it is expected to achieve price stability easily. In this paper, we investigate whether there is a positive effect of IT policy on price stability by using Survival Analysis with sample periods from 1980: Q1 to 2019: Q4. We explore whether the duration of high inflation episodes is shorter after IT policy and whether there are asymmetric behaviors of central banks by testing whether the duration that inflation rates stay above the upper bound is shorter than the one that inflation rates stay below the lower bound of a target range or tolerance band around a target. We find that the average duration of high inflation episodes is shorter after the implementation of IT policy. Also, there are asymmetric behaviors of central banks among some inflation targeters. Only a few of them (e.g. Czech Republic, Georgia, and Norway) respond to inflation rates above the upper bound of a target range or tolerance band more quickly. Our findings imply that central banks among inflation targeters under IT policy do achieve price stability, making efforts to keep inflation rates within a target range or a tolerance band around a target regardless of whether they stay above the upper or below the lower bound of a target range or a tolerance band