Endogeneity of Inflation Target

43 Pages Posted: 22 Dec 2016

See all articles by Soyoung Kim

Soyoung Kim

Seoul National University

Geung Hyung Yim

Bank of Korea - Economic Research Institute

Date Written: December 19, 2016

Abstract

Under inflation targeting, central banks set an inflation target in advance and then try to make an actual inflation hit the target. However, central banks may have an incentive to adjust the target to actual inflation rates such as past inflation rates, to make the actual inflation rate close to the target. This paper examines this issue of “endogeneity of inflation target” by using various empirical methods with the sample of 19 inflation targeting countries. Empirical results show that an inflation rate has significantly positive effect on the inflation target of the next period. Empirical results further suggest that this endogeneity of the inflation target is found more strongly in central banks with low credibility or weak performance than in central banks with high credibility or strong performance.

Keywords: Inflation Targeting, Inflation Rate, Inflation Target, Endogeneity

JEL Classification: E31, E58

Suggested Citation

Kim, Soyoung and Yim, Geung Hyung, Endogeneity of Inflation Target (December 19, 2016). Bank of Korea WP 2016-18, Available at SSRN: https://ssrn.com/abstract=2886146 or http://dx.doi.org/10.2139/ssrn.2886146

Soyoung Kim (Contact Author)

Seoul National University ( email )

Kwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)
+82-2-880- 2689 (Phone)

Geung Hyung Yim

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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