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A Nonparametric Approach to Evaluating Inflation-Targeting Regimes

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  • Weshah Razzak
  • Rabie Nasser

Abstract

We use a variety of nonparametric test statistics to evaluate the inflation- targeting regimes of Australia, Canada, New Zealand, Sweden and the UK. We argue that a sensible approach of evaluation must rely on a variety of methods, among them parametric and nonparametric econometric methods, for robustness and completeness. Our evaluation strategy is based on examining two possible policy implications of inflation targeting: First, a welfare implication and second, a real variability implication. The welfare implication involves evaluating a utility function, and tested by testing whether (1) the distributions of the levels and the growth rates of private consumption and leisure per capita remained unchanged under inflation targeting, i.e., first-order stochastic dominance; and (2) testing a linear combination of consumption and leisure per capita, where the parameter describing the utility of leisure or the relative preference of leisure is calibrated. Then we introduce nonparametric univariate and multivariate statistical methods to test whether the first and second moments of a variety of real variables, such as the real exchange rate depreciation rate, real GDP per capita growth rate in addition to private consumption per capita and leisure per capita growth rates, remained unchanged under inflation targeting, decreased or increased significantly. There seems to be some evidence of increased welfare under inflation-targeting regimes, but no concrete evidence is found that inflation targeting policy, in general, reduces real variability. Some cross country differences are also found.

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Bibliographic Info

Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI_RP_2008_18.

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Length: 55 pages
Date of creation: 18 Nov 2008
Date of revision:
Handle: RePEc:eei:rpaper:eeri_rp_2008_18

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Keywords: Nonparametric; First-order stochastic dominance; sudden shift in the distribution; inflation targeting.;

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  1. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
  2. Stephen Nickell, 2003. "Employment and Taxes," CESifo Working Paper Series 1109, CESifo Group Munich.
  3. Friedman, Milton, 1976. "Inflation and Unemployment," Nobel Prize in Economics documents 1976-1, Nobel Prize Committee.
  4. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
  5. Tommaso Monacelli, 1999. "Into the Mussa Puzzle: Monetary Policy Regimes and the Real Exchange Rate in a Small Open Economy," Boston College Working Papers in Economics 437, Boston College Department of Economics, revised 15 Sep 2000.
  6. Perron, Pierre, 1990. "Testing for a Unit Root in a Time Series with a Changing Mean," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 153-62, April.
  7. Razzak, W. A., 1991. "Target zone exchange rate," Economics Letters, Elsevier, vol. 35(1), pages 63-70, January.
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