Shades of inflation targeting: insights from fractional integration

We propose a novel approach to classifying inflation-targeting (IT) economies using fractionally integrated processes. Motivated by the rising prevalence and diversity of IT, we leverage variation in the persistence of inflation rates to identify four de facto strategies, or “shades” of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average, strict, flexible, and uncommitted IT. This framework sheds light on differences between declarative and actual strategies across 36 advanced and emerging economies. Most countries fall into the flexible IT category, though extreme cases, including uncommitted IT, occur quite frequently. Furthermore, we link our classification to institutional features of national frameworks using ordinal probit models. The results suggest differences across categories are related to variations in the maturity and stability of IT frameworks, with weaker connections to central bank independence and transparency.