Do bond markets find inflation targets credible? Evidence from five inflation-targeting countries

Young Min Kim, Kyu Ho Kang, Kook Ka

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)


This study quantifies the inflation-targeting credibility in expectation as perceived by bond markets, measured by the posterior probability of the expected inflation falling within the target range over time. To this end, we derive an analytical inflation-expectation expression from a macro-finance arbitrage-free affine term-structure model. We then simulate its posterior distributions to account for the parameter and yield curve factor uncertainties. According to our empirical results for five inflation-targeting countries that have announced target ranges since the 1990s, the credibility in expectation varies strongly over time and reveals substantial cross-country variation. Further, the inflation risk premium tends to be small when the credibility level is high.

Original languageEnglish
Pages (from-to)66-84
Number of pages19
JournalInternational Review of Economics and Finance
Publication statusPublished - 2020 May

Bibliographical note

Funding Information:
The authors would like to thank the editor, anonymous referees, In Do Hwang, and Hee Chang Jang, and seminar participants at the Bank of Korea for useful feedback. The views expressed in this paper are those of the authors and do not necessarily reflect the position of the Bank of Korea. Kang acknowledges financial support from the Bank of Korea. All errors are our own.

Publisher Copyright:
© 2020 Elsevier Inc.


  • Bayesian MCMC algorithm
  • Inflation risk premium
  • Macro-finance affine term-structure model
  • Parameter uncertainty

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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