Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets
AbstractWe explore the asymmetric behaviour of inflation around the target level for inflation-targeting emerging markets. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out-of-sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high, especially at long-horizons.
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Bibliographic InfoPaper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1342.
Date of creation: 2013
Date of revision:
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Inflation; forecasting; nonlinear adjustment;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-11-22 (All new papers)
- NEP-CBA-2013-11-22 (Central Banking)
- NEP-FOR-2013-11-22 (Forecasting)
- NEP-MAC-2013-11-22 (Macroeconomics)
- NEP-MON-2013-11-22 (Monetary Economics)
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