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Modeling The Non-Linear Behaviour of Inflation Deviations From The Target

  • Andros Gregoriou
  • Alexandros Kontonikas

This study tests for and models non-linearities in inflation deviations from the target in five OECD countries that adopted inflation targeting over the 1990s. Our tests reject the linearity hypothesis and we show that the exponential smooth transition autoregressive (ESTAR) model is capable of capturing the non-linear behavior ofinflation misalignments. The extent of inflation deviations from the target varies across the OECD countries, with countries that consistently undershoot the target having a rapid adjustment process, whereas countries that overshoot the target have a slower revision back to equilibrium.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2005_12.

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Date of creation: Sep 2005
Date of revision:
Handle: RePEc:gla:glaewp:2005_12
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  1. Sarantis, Nicholas, 1999. "Modeling non-linearities in real effective exchange rates," Journal of International Money and Finance, Elsevier, vol. 18(1), pages 27-45, January.
  2. Kontonikas, A., 2004. "Inflation and inflation uncertainty in the United Kingdom, evidence from GARCH modelling," Economic Modelling, Elsevier, vol. 21(3), pages 525-543, May.
  3. Michael, Panos & Nobay, A Robert & Peel, David A, 1997. "Transactions Costs and Nonlinear Adjustment in Real Exchange Rates: An Empirical Investigation," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 862-79, August.
  4. Orphanides, Athanasios & Wieland, Volker, 1999. "Inflation zone targeting," Working Paper Series 0008, European Central Bank.
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