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How hard can it be? Inflation control around the world

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  • Thórarinn G. Pétursson

Abstract

During the last two decades, the level and variability of inflation has declined across the world. Some countries have, however, had more success in controlling inflation than others, and the fact is that these countries are usually the same countries that have been more successful over longer periods. The focus of this paper is to try to understand what factors explain this difference in inflation performance and, in particular, why inflation turns out to be more volatile in very small, open economies and in emerging and developing countries than in the large and more developed ones. Using a country sample of 42 of the most developed countries in the world spanning the period 1985-2005, the results suggest three main explanations: the volatility of currency risk premiums, the degree of exchange rate pass-through to inflation, and the size of monetary policy shocks. These three variables explain about three-quarters of the cross-country variation in inflation volatility. The results are found to be robust to changes in the country sample and to different estimation methods. In particular, they do not seem to arise because of reverse causality due to possible endogeneity of the explanatory variables.

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  • Thórarinn G. Pétursson, 2008. "How hard can it be? Inflation control around the world," Economics wp40, Department of Economics, Central bank of Iceland.
  • Handle: RePEc:ice:wpaper:wp40
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    Cited by:

    1. Anand, Rahul & Prasad, Eswar S. & Zhang, Boyang, 2015. "What measure of inflation should a developing country central bank target?," Journal of Monetary Economics, Elsevier, vol. 74(C), pages 102-116.
    2. Baldursson, Fridrik Mar & Portes, Richard, 2013. "Gambling for resurrection in Iceland: the rise and fall of the banks," CEPR Discussion Papers 9664, C.E.P.R. Discussion Papers.
    3. Runchana Pongsaparn & Panda Ketruangroch & Dhanaporn Hirunwong, 2012. "Monetary Policy conduct in Review: The Appropriate Choice of Instruments," Working Papers 2012-05, Monetary Policy Group, Bank of Thailand.

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