Bank of England working paper finds inflation falls after inflation targeting adoption while professional forecasts barely adjust

The Bank of England published Staff Working Paper No. 1,175, “Targeting inflation expectations?”, examining how inflation expectations respond when countries move to inflation targeting. Combining a theoretical benchmark with cross-country survey evidence, the paper finds that realized inflation typically declines after adoption, but professional-forecaster expectations show little systematic adjustment at either the announcement or implementation of the regime change. In the model, adopting inflation targeting is treated as a downward shift in the central bank’s inflation objective: under rational expectations expected inflation jumps immediately, whereas under adaptive learning beliefs update gradually and expectations adjust only partially between announcement and implementation. The empirical event-study uses professional-forecaster surveys for 32 countries and staggered adoption timing and estimates close-to-zero effects on one-year-ahead expectations throughout the event window, while realized inflation falls following adoption and the decline is larger in economies with a single price-stability mandate; additional tests find little evidence of systematic changes in forecasters’ responsiveness to new information around adoption. The paper is published in the Bank’s staff working paper series to elicit comments and does not represent Bank of England policy.