The transition period before the inflation targeting policy

Essahbi Essaadi and Zied Ftiti ()

No 830, Working Papers from Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon

Abstract: In this paper, we study the inflation dynamics in an industrial inflation-targeting country (New Zealand). Our objective is to check if the inflation targeting policy has a transition period or not. Loosely speaking, we try to give some response to the famous debate: if the inflation targeting is a framework or a simple monetary rule. For this purpose, we use a frequency approach: Evolutionary Spectral Analysis, as defined by Priestley (1965-1996). Then, we detect endogenously a structural break point in inflation series, by applying a non-parametric test. This is the first time that this method is used in the case of inflation-targeting countries. Our main finding is that the adoption of the inflation-targeting policy in New Zealand was characterized by a transition period before the adoption of this framework. This period was characterized by many radical reforms, which caused a structural break in the New Zealand inflation series. These reforms were made to lead back the inflation close to the initial target. In addition, these reforms increased the transparency and the credibility of the monetary policy. We conclude from our frequency analysis that the inflation series becomes stable in long-term after the adoption of the inflation targeting. This can be a justification of the effectiveness of this policy to ensure the price stability.

Keywords: New Zealand; Inflation Targeting; Spectral Analysis and Structural Change (search for similar items in EconPapers)
JEL-codes: C16 E52 E63 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: The transition period before the inflation targeting policy (2008)
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