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Does inflation targeting matter for the behavior of inflation and output growth? Some regime-based evidence for Asian economies

Author

Listed:
  • Harold Glenn A. Valera
  • Mark J. Holmes
  • Gazi M. Hassan

Abstract

Purpose - The purpose of this paper is to consider whether or not the introduction of inflation targeting (IT) impacts on the mean-reversion properties of inflation and output growth. Design/methodology/approach - Focusing on eight Asian countries of which four are inflation-targeters, the authors employ a two-state Markov-switching model which characterizes the behavior of inflation and output growth as regime-dependent based on periods of stationarity or non-stationarity. Findings - In contrast to a literature that offers mixed findings, the authors find the presence of stationary inflation and output growth in one regime for all IT countries, except for South Korea which is characterized by stationary output growth in both regimes. In the cases of South Korea and Thailand, IT reduces the probability of inflation remaining in a non-stationary regime. IT increases the probability of South Korea remaining in a regime of low persistence output growth. While IT is important in understanding behavior, so are other considerations such as exchange rate volatility, as well as the Asian and global financial crises. Originality/value - In contrast to other unit root tests of inflation and output growth, a novelty of the approach is that the authors obtain new insights in terms of two concepts of stationarity that allow for inflation and output growth to switch between stationary and non-stationary regimes (partial stationarity), or between stationary regimes of differing degrees of persistence (varied stationarity).

Suggested Citation

  • Harold Glenn A. Valera & Mark J. Holmes & Gazi M. Hassan, 2018. "Does inflation targeting matter for the behavior of inflation and output growth? Some regime-based evidence for Asian economies," Journal of Economic Studies, Emerald Group Publishing Limited, vol. 45(5), pages 932-955, October.
  • Handle: RePEc:eme:jespps:jes-01-2017-0023
    DOI: 10.1108/JES-01-2017-0023
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    Citations

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    Cited by:

    1. Khan, Najib, 2022. "How Do Middle-Income Countries Fare Under an Inflation Targeting Regime," Journal of Economic Development, The Economic Research Institute, Chung-Ang University, vol. 47(4), pages 79-98, December.

    More about this item

    Keywords

    Inflation targeting; Inflation; Output growth; Markov-switching ADF; C32; E31; E58;
    All these keywords.

    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; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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