Distribution forecast targeting in an open-economy, macroeconomic volatility and financial implications



Flamini, Alessandro and Milas, Costas ORCID: 0000-0002-9789-384X
(2015) Distribution forecast targeting in an open-economy, macroeconomic volatility and financial implications. Journal of Financial Stability, 16. pp. 89-105.

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Abstract

In an open-economy faced with parameter uncertainty, this paper uses distribution forecasts to investigate the impact of alternative inflation targeting policies on macroeconomic volatility and their potential implications on financial stability. Theoretically, Domestic Inflation Targeting (DIT) leads to less volatility than Consumer Price Index Inflation Targeting (CPIIT) for several macroeconomic variables and, in particular, for the interest rate. Empirically, a positive relationship between interest rate volatility and financial instability emerges for the US, UK and Sweden since the early 1990s. Bridging theory and empirical evidence, we conclude that the choice of the inflation targeting regime has an important impact on macroeconomic volatility and potential implications for financial stability.

Item Type: Article
Uncontrolled Keywords: Macroeconomic volatility, Financial stability, Interest rate volatility, Multiplicative uncertainty, Markov jump-linear-quadratic systems, Optimal monetary policy
Depositing User: Symplectic Admin
Date Deposited: 03 Mar 2016 11:50
Last Modified: 17 Dec 2022 01:27
DOI: 10.1016/j.jfs.2014.12.001
Related URLs:
URI: https://livrepository.liverpool.ac.uk/id/eprint/2053443

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