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Changes in inflation dynamics under inflation targeting? Evidence from Central European countries

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  • Baxa, Jaromír
  • Plašil, Miroslav
  • Vašíček, Bořek

Abstract

Many countries have implemented inflation targeting in recent decades. At the same time, the international conditions have been favorable, so it is hard to assess to what extent the success in stabilizing inflation should be attributed to good luck and to what extent to the specific policy framework. In this paper, we provide a novel look at the dynamics of inflation under inflation targeting, focusing on three Central European (CE) countries that adopted the IT regime at similar times and in similar environments. We use the framework of the open economy New Keynesian Phillips curve (NKPC) with time-varying parameters and stochastic volatility to recover changes in price-setting and expectation formation behavior and volatility of shocks. We employ Bayesian model averaging to tackle the uncertainty in the selection of instrumental variables and to account for the possible country-specific nature of inflation dynamics. The results suggest that inflation targeting does not itself automatically trigger changes in the inflation process, and the way the framework is implemented might matter. In particular, we find rather heterogeneous evolution of intrinsic inflation persistence and volatility of inflation shocks across these countries despite the fact that all three formally introduced inflation targeting a decade ago.

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  • Baxa, Jaromír & Plašil, Miroslav & Vašíček, Bořek, 2015. "Changes in inflation dynamics under inflation targeting? Evidence from Central European countries," Economic Modelling, Elsevier, vol. 44(C), pages 116-130.
  • Handle: RePEc:eee:ecmode:v:44:y:2015:i:c:p:116-130
    DOI: 10.1016/j.econmod.2014.10.028
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    13. Vít Pošta, 2015. "Semi-structural estimates of time-varying NAIRU based on the new Keynesian Phillips curve: evidence from Eastern European economies," Empirical Economics, Springer, vol. 49(4), pages 1217-1243, December.
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    More about this item

    Keywords

    Bayesian model averaging; Central European countries; Inflation dynamics; New Keynesian Phillips curve; Time-varying parameter model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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