The Impact of Monetary Strategies on Inflation Persistence

31 Pages Posted: 21 Feb 2017

See all articles by Evzen Kocenda

Evzen Kocenda

Charles University in Prague - Institute of Economic Studies; Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics; CESifo; University of Regensburg - Institute for East and Southeast European Studies; University of Michigan at Ann Arbor - The William Davidson Institute

Balazs Varga

Corvinus University of Budapest

Date Written: February 7, 2017

Abstract

We analyze the impact of price stability-oriented monetary strategies (inflation targeting — IT — and constraining exchange rate arrangements) on inflation persistence using a time-varying coefficients framework in a panel of 68 countries (1993–2013). We show that explicit IT has a stronger effect on taming inflation persistence than implicit IT and is effective even during and after the financial crisis. We also show that once a country hits the ZLB its inflation persistence mildly decreases and that there exists a mild pull to return to inflation persistence mean once a central bank moves away from its inflation target. The link between inflation persistence and constraining exchange rate regimes is less pronounced than that of IT and regimes with the U.S. dollar as a reserve currency are less effective than those using the Euro (Deutsche mark). On other hand, the U.S. persistence transers disproportionately lower effect on other countries’ persistence than the IP of Germany.

Keywords: Inflation Persistence, Inflation Targeting, Exchange Rate Regime, Flexible Least Squares

JEL Classification: C220, C320, E310, E520, F310

Suggested Citation

Kocenda, Evzen and Varga, Balazs, The Impact of Monetary Strategies on Inflation Persistence (February 7, 2017). CESifo Working Paper Series No. 6306. Available at SSRN: https://ssrn.com/abstract=2920663

Evzen Kocenda (Contact Author)

Charles University in Prague - Institute of Economic Studies ( email )

Opletalova St. 26
Prague, 11000
Czech Republic

HOME PAGE: http://kocenda.fsv.cuni.cz

Institute of Information Theory and Automation (Czech Academy of Sciences) - Department of Econometrics ( email )

Pod vodarenskou vezi 4
CZ-18208 Praha 8
Czech Republic

CESifo

Poschinger Str. 5
Munich, DE-81679
Germany

University of Regensburg - Institute for East and Southeast European Studies

Landshuterstr. 4
Regensburg, 93047
Germany

University of Michigan at Ann Arbor - The William Davidson Institute

724 E. University Ave.
Wyly Hall
Ann Arbor, MI 48109-1234
United States

Balazs Varga

Corvinus University of Budapest ( email )

Hungary

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