Munich Personal RePEc Archive

Is inflation targeting compatible with economic growth ? Korean experience based on ARDL and NARDL

Affendi, Diyana Najwa and Masih, Mansur (2018): Is inflation targeting compatible with economic growth ? Korean experience based on ARDL and NARDL.

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Abstract

The relationship between inflation and growth has been one of the most widely researched topics in economics. Studies have shown various outcomes, deeming positive, negative and non-existence of relationship between the two macroeconomic variables, and the result varies among the areas of study. The complex dynamics between inflation and growth has made it difficult for policy makers to comprehend whether inflation targeting policy will result in favourable or adverse effect to the economic growth. This paper aims to study the relationship between inflation and economic growth in South Korea, one of the fastest growing economies in Asia. Consumer Price Index (CPI) will be used as an indicator for inflation and GDP by market price is used to represent the economic growth. Using the recent time series techniques, ARDL and NARDL, the study seeks to find the long-term relationship and causality between the two variables. Based on the results, it is found that inflation is exogenous, while GDP is endogenous. The relationship between inflation and GDP is also found to be asymmetric in the long run. The policy implication of this study is that the central bank of Korea should not adopt inflation targeting policy while having the objective of boosting the GDP in mind since they are conflicting macroeconomic objectives. Instead, inflation targeting policy should be applied mainly to focus on keeping the price stability.

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