| In recent years, many countries have adopted a new monetary policy regime, so called inflation targeting; partly because of the failure of other nominal anchors and partly from recognizing the importance of credibility in monetary policy. The economic performance of the new policy appears promising at least in terms of low inflation rate but not without cost. In this dissertation we investigate whether this new monetary policy regime resulted in enhancement of credibility. We use new expectation formation model incorporating learning mechanism to obtain evidence that this new monetary policy regime may be promising in the future.; Several structural break tests are applied to the expectation augmented Phillips curve both under Keynesian and Classical identification. Some structural break tests reveal favorable evidence for the inflation targeting countries, especially when transition periods are allowed. But, overall, strong evidence does not exist. With all the intuitive advantages of the inflation targeting, further analysis over a greater time horizon will be needed before a final assessment is made. |
