Essays on Inflation Targeting and Export Price Dynamics

Abstract: Essay 1: This paper evaluates inflation targeting for ten countries. Assuming that the inflation targeting central bank's only concern is inflation around the target, expectations of the future deviation from the target given information about the deviation from the target today should be equal to zero. Testing this hypothesis, I find that data for the United Kingdom, Canada, Australia, Korea, the Czech Republic, and Chile are consistent with the central bank behaving as a strict inflation targeter. Korea has behaved most in line with a strict inflation targeter. In an extended approach lagged output gap is added as an information variable. In the extended case the null hypothesis of central banks behaving as a strict inflation targeter can be rejected for seven countries.Essay 2: The monetary policy of five industrialized countries which have had explicit inflation targets for more than 15 years is studied. Considering the case of discretionary policy as well as commitment, I estimate two first-order conditions. The results support the theory of flexible inflation targeting under discretion for the United Kingdom. For New Zealand, the results under discretion suggests that monetary policymakers have been leaning with the wind rather than against the wind. The central banks of Canada, Sweden, and Australia have behaved in line with the theory of flexible inflation targeting under commitment.Essay 3: This paper studies the effects on export prices (in the currency of the exporter) of shocks to the exchange rate, the exporting firms' costs and foreign prices. The theoretical analysis is done with alternative assumptions regarding the currency in which prices are set and the desired markup. Then, a VAR framework is used to analyze which theory predicts actual outcome the best. The results indicate that export prices respond strongly to exchange rate shocks and the effects seem to be in line with the theory of producer currency pricing and pricing to market. Wage shocks have insignificant effects.