Monetary policy effectiveness and inflation targeting

The purpose of this thesis is to check the effectiveness of monetary policy on macroeconomic indicators after the adoption of inflation targeting for randomly chosen 10 economies to fill the gap in the literature. For this purpose, the effectiveness of interest rates on output gap and inflation rates have been measured to compare the differences for pre and post targeting periods by evaluating VAR model analysis. The duration and magnitude of a shock is investigated by implementing impulse response functions. Effectiveness on output gap is found out significant for Iceland, South Korea, Mexico, Norway, Poland, Romania and Turkey and insignificant for Czech Republic, Republic of Serbia and the U.K. for pre-targeting period but significant for all economies for post-targeting period. Effectiveness on inflation has been found out significant for South Korea, Mexico, Romania and Turkey but insignificant for Czech Republic, Iceland, Norway, Poland, Republic of Serbia and the U.K. for pre-targeting. For post-targeting period, the findings have revealed effectiveness on inflation is significant for Czech Republic, Iceland, South Korea, Mexico, Norway, Poland, Republic of Serbia and the U.K.. Findings reveal that effectiveness of monetary policy on output gap has been relevant for all countries after the adoption of inflation targeting by making effectiveness on output gap more obvious. The similar conclusion holds for effectiveness on inflation rates for post-targeting (except Turkey and Romania) implying the evidence for effectiveness on macroeconomic indicators after the adoption of inflation targeting. Keywords: Inflation Targeting Regime, VAR Model, Impulse Response Function, Effectiveness of Monetary Policy, Output Gap