Dąbrowski, Marek A. and Janus, Jakub and Mucha, Krystian (2025): Shades of inflation targeting: insights from fractional integration.
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Abstract
In this paper, we propose a novel approach to classifying inflation-targeting (IT) economies based on fractionally integrated processes. Motivated by the rising prevalence and diversity of IT strategies, we leverage variation in the persistence of inflation rate series to identify four de facto IT strategies, or ‘shades’ of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average IT, strict IT, flexible IT, and uncommitted IT categories. This framework sheds light on the differences between declarative and actual monetary policy strategies across 36 advanced and emerging market economies. Notably, we demonstrate that while most economies fall into the flexible IT category, extreme cases, including the uncommitted IT category, occur with marked frequency. Furthermore, we link our IT classification to institutional features of national monetary frameworks using ordinal probit models. The results suggest that differences across IT categories are related to variations in the maturity and stability of IT frameworks, with less pronounced connections to central bank independence and transparency.
Item Type: | MPRA Paper |
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Original Title: | Shades of inflation targeting: insights from fractional integration |
Language: | English |
Keywords: | inflation targeting, monetary policy strategy, central banking, inflation persistence, fractional integration |
Subjects: | C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies |
Item ID: | 123455 |
Depositing User: | Prof. Marek A. Dąbrowski |
Date Deposited: | 30 Jan 2025 14:20 |
Last Modified: | 30 Jan 2025 14:20 |
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URI: | https://mpra.ub.uni-muenchen.de/id/eprint/123455 |