THE IMPACT OF INFLATION TARGETING ON INFLATION

Abstract

This paper works closely with literature to investigate the impact of inflation targeting on inflation variance, used as a proxy for inflation uncertainty. An analysis of previous work and related economic theory is posed. A GARCH methodology is implemented to measure inflation volatility, utilizing a variable to measure the presence of inflation targeting in relation to inflation variance. Also, a study of the impact of inflation levels on inflation volatility is conducted, in which the Friedman hypothesis is in question. It is found that most countries studied had significantly lower inflation variance after adoption of targeting. In half of the countries studied, the Friedman hypothesis could not be