A new test for the success of inflation targeting

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Universidad Torcuato Di Tella. Escuela de Negocios. Centro de Investigaciones en Finanzas (CIF)

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We propose a new test, derived from a set of variance decompositions of a structural VAR, for the success of inflation targeting. In contrast to standard sacrifice ratios this test considers changes in the structure of real and nominal shocks; second moment effects. We find strong support for IT with 7 of the 9 countries in our sample having negative “sacrifices” and many countries with “benefits”. However, we also find very different performances across IT countries.

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