nr 029 - Capital Market Frictions, Business Cycle and Monetary Transmission

DNB Working Papers
Date 21 February 2005

We identify credible monetary policy with first, a disconnect between inflation and inflation expectations and second, the anchoring of the latter at the inflation target announced by the monetary authorities. We test empirically whether this is the case for a number of countries that have an explicit inflation target and therefore include the Euro Area. We find that for the last 10 year period, the two series are less dependent on each other and that announcing inflation targets help anchor expectations at the right level.

Keywords: Inflation Targets, Measures of Credibility.

JEL Classification : E52, E58.