We estimate monetary policy activism, defined as responsiveness of the policy interest rate to inflation, among five inflation-targeting countries (the UK, Canada, Sweden, Australia and New Zealand) plus the G3 (the US, Japan and Germany) by applying a time-varying parameter with a stochastic-volatility model. We find that activism of inflation-targeting countries tends to have increased before (not after) the adoption of the inflation-targeting policy framework and that these countries have experienced a decline in activism in recent years, albeit to different degrees. We further explore this result in terms of the constraint of an inflation target range by developing a formal theoretical model in a New Keynesian framework.
Keywords: Inflation-targeting Policy; Monetary Policy Activism; New Keynesian Model; Markov chain Monte Carlo; Time-varying Parameter with Stochastic Volatility Model
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.