ECB Working Paper: Targeting Inflation Range Not Less Effective Than a Point Target
31 May 2021
By David Barwick – FRANKFURT (Econostream) – Central banks that target an inflation range are not necessarily likelier to find it harder to anchor expectations than their peers whose inflation targeting relies on another formulation of the inflation objective, according to a European Central Bank working paper published Monday.
The working paper set out to determine how the choice of inflation target by central banks influences the anchoring of inflation expectations, asking in particular whether relying on a target range leads to a better or worse outcome versus a point target or a point target that allows deviations.
‘’The key finding of the paper is that target ranges, even though they could potentially be less effective in anchoring inflation expectations because they provide more flexibility to the central bank, do not appear to perform any worse than the other types – in several tests, they even come out first’, the paper said.
When missed, a target range is associated with ‘substantially’ higher forecaster disagreement in emerging market economies, according to the paper, raising the possibility that they harbour greater risks for the credibility of the central bank.
This was not the case with advanced economies, for which the paper found that when actual inflation missed a point target, inflation expectations exhibited a greater tendency to disanchor.
However, ‘none of the target types consistently outperforms the others, suggesting that while there are some benefits to adopting an interval, there are also other factors through which the central bank can aid the anchoring of inflation expectations’, the paper said.