Author: Gisle Andre Unum

Publisher:

Published: 2008

Total Pages: 110

ISBN-13:

Inflation targeting was fIrst introduced by New Zealand in the early 1990s. Then several other developed countries like Australia, Great Britain and Sweden followed up the policy of New Zealand. Parallel with the introduction of inflation targeting in different countries, the amount of research grew as well. Several papers support inflation targeting in the sense that they claim inflation targeting lowers and stabilize the inflation. To conduct inflation targeting policy, the central bank has to be transparent. Thereby, there is reason to believe that interest rates could be more stable as well, because the market should have more information about the central bank's policy. Kia (2005) constructs a market based transparency index to measure the level of transparency in the United States. This index is then used for measuring how the transparency can influence the volatility in the money market. Norway introduced inflation targeting in 2001. This research fIrst measures whether the transparency has increased after the introduction of inflation targeting in 2001. Then it uses the index to measure whether the introduction of inflation targeting and an increasing transparency influence the volatility in the money market, Government bond market and the foreign exchange market. The results show that the transparency has increased after the introduction of the inflation targeting. There is also empirical evidence of lower volatility in the money market and the Government bond market. However, it is diffIcult to draw any conclusions from the foreign exchange market.