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Inflation Convergence Across Countries

Author

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  • Markus Hyvonen

    (Reserve Bank of Australia)

Abstract

Ball and Sheridan (forthcoming) show that OECD countries with a history of high inflation before the 1990s have subsequently experienced a larger degree of disinflation than countries with a history of low inflation. They label this process ‘regression to the mean’, and argue that it explains why those OECD countries which adopted inflation targeting experienced larger falls in inflation compared to other OECD countries. This paper explores further this phenomenon of convergence of inflation rates across countries. An extension of the analysis used by Ball and Sheridan finds that convergence in inflation rates also occurs in a much larger sample of countries over the same time period that they study. However, tests using data from the 1960s to the 1980s show that inflation convergence across OECD countries does not occur consistently over time. In contrast, when this analysis is repeated with data for US metropolitan regions, convergence occurs consistently since the early 1960s. Interpreted in the context of historical developments in monetary policy, the evidence suggests that rather than just being a mechanical occurrence, the convergence in national inflation rates experienced in the 1990s was brought about by monetary policy becoming more similar across countries, with authorities becoming more focused on achieving low inflation, especially in those countries which had been less successful in reducing inflation in the 1980s. In other words, the adoption of inflation targeting at least partly contributed to inflation convergence in the 1990s.

Suggested Citation

  • Markus Hyvonen, 2004. "Inflation Convergence Across Countries," RBA Research Discussion Papers rdp2004-04, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2004-04
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    File URL: http://www.rba.gov.au/publications/rdp/2004/pdf/rdp2004-04.pdf
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    References listed on IDEAS

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    1. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series,in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372 Central Bank of Chile.
    2. Kenen,Peter B., 1995. "Economic and Monetary Union in Europe," Cambridge Books, Cambridge University Press, number 9780521558839, December.
    3. Yifan Hu, 2003. "Empirical Investigations of Inflation Targeting," Working Paper Series WP03-6, Peterson Institute for International Economics.
    4. N. Gregory Mankiw, 2001. "U. S. Monetary Policy During the 1990s," Harvard Institute of Economic Research Working Papers 1927, Harvard - Institute of Economic Research.
    5. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
    6. Frederic Mishkin & Klaus Schmidt-Hebbel, 2002. "A Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," Central Banking, Analysis, and Economic Policies Book Series,in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 4, pages 171-220 Central Bank of Chile.
    7. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, pages 1297-1315.
    8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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    Citations

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    Cited by:

    1. Zied SAYARI & Rima LAJNAF, 2017. "Inflation targeting and volatility: Panel evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, vol. 0(1(610), S), pages 57-68, Spring.
    2. Moretti, Laura, 2014. "Inflation targeting and product market deregulation," Journal of Macroeconomics, Elsevier, pages 372-386.
    3. Zied SAYARI & Rima LAJNAF, 2017. "Inflation targeting and volatility: Panel evidence," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania - AGER, pages 57-68.
    4. Giulio Palomba & Emma Sarno & Alberto Zazzaro, 2009. "Testing similarities of short-run inflation dynamics among EU-25 countries after the Euro," Empirical Economics, Springer, pages 231-270.
    5. Sandra Hlivnjak & Nick Adnett, 2012. "Current Account convergence in the Western Balkans," International Journal of Economic Policy in Emerging Economies, Inderscience Enterprises Ltd, vol. 5(1), pages 82-103.
    6. Arestis, Philip & Chortareas, Georgios & Magkonis, Georgios & Moschos, Demetrios, 2014. "Inflation targeting and inflation convergence: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 31(C), pages 285-295.
    7. Frederic S. Mishkin, 2006. "Monetary Policy Strategy: How Did We Get Here?," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 53(4), pages 359-388, December.
    8. Libich, Jan, 2008. "An explicit inflation target as a commitment device," Journal of Macroeconomics, Elsevier, pages 43-68.
    9. Michael J. Dueker & Andreas M. Fischer, 2006. "Do inflation targeters outperform non-targeters?," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 431-450.
    10. Metin Ozdemir & Selim Tuzunturk, 2009. "Is price stability enough? Macroeconomic performance of inflation targeting in developing countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 1(4), pages 352-372.
    11. Nikola Dvornak & Marion Kohler & Gordon Menzies, 2005. "Australia's Medium-Run Exchange Rate: A Macroeconomic Balance Approach," The Economic Record, The Economic Society of Australia, pages 101-112.

    More about this item

    Keywords

    inflation; monetary policy;

    JEL classification:

    • 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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