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The Price Stability Under Inflation Targeting Regime : An Analysis With a New Intermediate Approach

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  • Zied Ftiti
  • Walid Hichri

Abstract

This paper analyzes the relevance of the inflation targeting (IT) policy in achieving its primary goal of medium-term price stability. Contrary to previous studies, we propose, in this work, a new approach; an intermediate approach that consists in conducting a time-series analysis (employed in the literature under unilateral cases-absolute approach-) with a comparison of inflation performance of IT countries and those of non-IT countries (comparison made in literature under the relative approach). Empirically, we employ a frequency analysis based on evolutionary spectral theory of Priestley (1965-1996) in order to distinguish between different inflation horizons; short-run and the medium-run inflation rate. To check the stability of spectral density functions for inflation series for each country under studied frequencies, we apply a Bai and Perron (2003a, b) test. Our results show that after IT framework implementation, there is no break point in inflation series in short and medium terms. This result is not verified for non-IT countries. Therefore, IT is more relevant in achieving price stability and consequently more effective on inflation expectation anchoring than other monetary policies.

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Bibliographic Info

Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-099.

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Length: 23 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-099

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Keywords: Inflation Targeting; Inflation Stability; Structural Change; Evolutionary Spectral Analysis; intermediate approach; pre-requisite.;

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