Can inflation targeting mitigate monetary policy time-inconsistency?


  • Gabriel Caldas Montes Department of Economics, Fluminense Federal University Rio de Janeiro, Brazil



Cointegration, Monetary policy, Inflation targeting time-inconsistency.


Although the adoption of inflation targeting can, on average, bring benefits to developing countries, however, adopting this scheme is not necessarily sufficient to mitigate the time-inconsistency problem of monetary policy. The present paper makes use of two theoretical models in order to analyze for the Brazilian case whether it is possible for the monetary authority to conduct time-inconsistent monetary policies even under inflation targeting. The results obtained for Brazil allow one to conjecture that the traditional argument that the adoption of inflation targeting can avoid the time-inconsistency problem is not necessarily true.


Akay, H. K., Nargelecekenler, M., 2007. Is there the time-inconsistency problem in Turkey? Journal of Economic Studies, 34(5): 389-400.

Ball, L., Sheridan, N., 2005. Does inflation targeting matter? In: Bernanke, B.S., Woodford, M. (Eds.), The Inflation-Targeting Debate. University of Chicago Press.

Barro, R. J., Gordon, D. B., 1983. Rules, discretion and reputation in a model of monetary policy. Journal of Monetary Economics, 12(1): 101-121.

Blinder, A., 1997. What central bankers could learn from academics – and vice versa. Journal of Economic Perspectives, 11(2): 3–19.

Cukierman, A., Webb, S., Neyapti, B., 1992. Measuring the independence of central banks and its effects on policy outcomes. World Bank Economic Review, 6(3): 353-398.

Cukierman, A., 2000. The Inflation Bias Result Revisited. Tel-Aviv University, April, Mimeo.

de Mendonça, H. F., 2009. Output-inflation and unemployment-inflation trade-offs under inflation targeting: Evidence from Brazil. Journal of Economic Studies, 36(1): 66-82.

de Mendonça, H. F., de Guimarães e Souza, G. J., 2012. Is inflation targeting a good remedy to control inflation? Journal of Development Economics, 98(2): 178-191.

Doyle, M., Falk, B., 2008. Testing Commitment Models of Monetary Policy: Evidence from OECD Economies. Journal of Money, Credit and Banking, 40(2-3): 409-425.

Engle, R. F., Granger, C. W. J., 1987. Co-integration and Error Correction: Representation, Estimation, and Testing. Econometrica, 55(2): 251–276.

Gonçalves, C. E. S., Sales, J. M., 2008. Inflation targeting in emerging economies: What do the data say? Journal of Development Economics, 85(1-2): 312–318.

Gregory, A., Hansen, B., 1996. Residual-based Tests for Cointegration in Models with Regime Shifts. Journal of Econometrics, 70(1): 99-126.

Gupta, R., Uwilingiye, J., 2010. Dynamic time inconsistency and the South African Reserve Bank. South African Journal of Economics, 78(1): 76-88.

Ireland, P. N., 1999. Does the time-consistency problem explain the behavior of inflation in the United Sates? Journal of Monetary Economics, 44(2): 279-291.

Johansen, S., 1991. Estimation and hypothesis testing of cointegration vectors in gaussian vector autoregressive models. Econometrica, 59(6): 1551–1580.

Kydland, F., Prescott, E., 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy, 85(3): 473-491.

Montes, G. C., de Mendonça, H. F., Bastos, J. C. A., 2014. Time inconsistency problem: less common than we think. Journal of Economic Studies, 41(5).

Özlale, Ü., Özcan, K. M., 2005. Does time inconsistency problem apply for Turkish monetary policy? METU Studies in Development, 32(2): 467-88.

Pierdzioch, C., Stadtmann, G., 2011. Does the ECB have a time-inconsistency problem? A note. Scottish Journal of Political Economy, 58(2): 189-199.

Ruge-Murcia, F., 2003. Does the Barro-Gordon model explain the behavior of U.S. inflation? A reexamination of the empirical evidence. Journal of monetary economics, 50(6): 1375-1390.

Taylor, J. B., 2012. Monetary policy rules work and discretion doesn’t: A tale of two eras. Journal of Money, Credit and Banking, 44(6): 1017-1032.

Walsh, C., 1995. Optimal Contracts for Central Bankers. The American Economic Review, 85(1): 150-167.

Zivot, E., Andrews, D. W. K., 1992. Further evidence on the Great Crash, the oil-price shock and the unit hypothesis. Journal of Business and Economic Statistics, 10(3): 251–270.