Working Paper: CEPR ID: DP8046
Authors: Stefan Gerlach; Peter Tillmann
Abstract: Following the Asian financial crisis in 1997-98, a number of Asian central banks adopted inflation targeting. We explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find a significant reduction in inflation persistence following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting do not show a decline in persistence. Measuring the performance of monetary policy strategies in terms of inflation persistence rather than the level of inflation shows that inflation targeting performs better than alternative strategies.
Keywords: Asia; Inflation Persistence; Inflation Targeting; Monetary Policy Strategy
JEL Codes: C22; E31; E5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adoption of inflation targeting (IT) (E52) | Reduction in inflation persistence (E31) |
| Inflation persistence before adoption of IT (E31) | Inflation persistence after adoption of IT (E31) |
| Countries adopting IT (L86) | Countries not adopting IT (O57) |
| External shocks (e.g., oil and food prices) (Q43) | Inflation dynamics (E31) |