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Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets

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  • Kurmas Akdogan

Abstract

We 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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File URL: http://www.tcmb.gov.tr/research/teblig/abstract/wp1342_eng.php
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Bibliographic Info

Paper provided by Research and Monetary Policy Department, Central Bank of the Republic of Turkey in its series Working Papers with number 1342.

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Date of creation: 2013
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Handle: RePEc:tcb:wpaper:1342

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Keywords: Inflation; forecasting; nonlinear adjustment;

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