Inflation Targeting: New Evidence from Fractional Integration and Cointegration
Journal of Economics and Business, July-August 2017
36 Pages Posted: 21 Aug 2016 Last revised: 26 Nov 2017
Date Written: August 19, 2016
We investigate inflation persistence in six inflation targeting (IT) countries from the global-economy perspective. This view maintains that inflation persistence in IT countries has declined mainly because of the decline of inflation persistence in the global economy. We provide empirical evidence on two yet unanswered questions. First, we investigate whether each IT country in the sample share a common persistence with Germany and the US, two non-IT countries with a relatively good inflation record, which we use as proxies for the global economy. This tests the weak-form global hypothesis. Second, for the countries that share common inflation persistence with Germany and the US, we examine whether the same long memory component drives their inflationary processes to converge in the long-run to a common stochastic equilibrium with Germany and the US. This tests the strong-form global hypothesis. Our findings cast doubt on the relevance of IT in the industrial, but not developing, countries in the sample, suggesting that the global economy probably played an important role in the decline of inflation persistence in industrial, but not developing, countries.
Keywords: inflation targeting, inflation persistence, fractional integration, cointegration
JEL Classification: C14; E31; C22
Suggested Citation: Suggested Citation