Band or Point Inflation Targeting? An Experimental Approach

Camille Cornand (1) , Cheick Kader M'Baye (2)

1 GATE Lyon Saint-Étienne - Groupe d'Analyse et de Théorie Economique Lyon - Saint-Etienne
2 Université de Bamako

We conduct laboratory experiments with human subjects to test the rationale of adopting a band versus point inflation targeting regime. Within the standard New Keynesian model, we evaluate the macroeconomic performances of both regimes according to the strength of shocks affecting the economy. We find that when the economy faces small shocks, the average level of inflation as well as its volatility are significantly lower in a band targeting regime, while the output gap and interest rate levels and volatility are significantly lower in a point targeting regime with tolerance bands. However, when the economy faces large shocks, choosing the suitable inflation targeting regime is irrelevant because both regimes lead to comparable performances. These findings stand in contrast to those of the literature and question the relevance of clarifying a mid-point target within the bands, especially in emerging market economies more inclined to large and frequent shocks.

Mots clés: Band inflation target; point inflation target; inflation expectations; monetary policy; New Keynesian model; macroeconomic shocks; laboratory experiments

Domaines: Economies et finances

Camille Cornand, Cheick Kader M'Baye. Band or Point Inflation Targeting? An Experimental Approach. 2016. ⟨halshs-01313095⟩