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Inflation Convergence Across Countries

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  • Markus Hyvonen

    (Reserve Bank of Australia)

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    Abstract

    Ball and Sheridan (forthcoming) show that OECD countries with a history of high inflation before the 1990s have subsequently experienced a larger degree of disinflation than countries with a history of low inflation. They label this process ‘regression to the mean’, and argue that it explains why those OECD countries which adopted inflation targeting experienced larger falls in inflation compared to other OECD countries. This paper explores further this phenomenon of convergence of inflation rates across countries. An extension of the analysis used by Ball and Sheridan finds that convergence in inflation rates also occurs in a much larger sample of countries over the same time period that they study. However, tests using data from the 1960s to the 1980s show that inflation convergence across OECD countries does not occur consistently over time. In contrast, when this analysis is repeated with data for US metropolitan regions, convergence occurs consistently since the early 1960s. Interpreted in the context of historical developments in monetary policy, the evidence suggests that rather than just being a mechanical occurrence, the convergence in national inflation rates experienced in the 1990s was brought about by monetary policy becoming more similar across countries, with authorities becoming more focused on achieving low inflation, especially in those countries which had been less successful in reducing inflation in the 1980s. In other words, the adoption of inflation targeting at least partly contributed to inflation convergence in the 1990s.

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    Bibliographic Info

    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2004-04.

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    Date of creation: Jun 2004
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    Handle: RePEc:rba:rbardp:rdp2004-04

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    Related research

    Keywords: inflation; monetary policy;

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    References

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    1. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
    2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    3. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    4. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," NBER Working Papers 12876, National Bureau of Economic Research, Inc.
    5. Frederic Mishkin & Klaus Schmidt-Hebbel, 2002. "A Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 4, pages 171-220 Central Bank of Chile.
    6. Yifan Hu, 2003. "Empirical Investigations of Inflation Targeting," Working Paper Series WP03-6, Peterson Institute for International Economics.
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    Cited by:
    1. Christopher Kent & Kylie Smith & James Holloway, 2005. "Declining Output Volatility: What Role for Structural Change?," RBA Research Discussion Papers rdp2005-08, Reserve Bank of Australia.
    2. Metin Ozdemir & Selim Tuzunturk, 2009. "Is price stability enough? Macroeconomic performance of inflation targeting in developing countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 1(4), pages 352-372.
    3. Michael J. Dueker & Andreas M. Fischer, 2006. "Do inflation targeters outperform non-targeters?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 431-450.

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