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Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Countries

Kurmaş Akdoğan

Scottish Journal of Political Economy, 2015, vol. 62, issue 5, 486-504

Abstract: type="main" xml:id="sjpe12089-abs-0001">

We explore the asymmetric behaviour of inflation around the target level for inflation-targeting countries. The first rationale behind this asymmetry is the asymmetric policy response of the central bank around the target. Central banks could have a stronger bias towards overshooting rather than undershooting the inflation target. Consequently, the policy response would be stronger once the inflation jumps above the target, compared to a negative deviation. Second rationale is the asymmetric inflation persistence. We suggest that recently developed Asymmetric Exponential Smooth Transition Autoregressive (AESTAR) model provides a convenient framework to capture the asymmetric behaviour of inflation driven by these two effects. We further conduct an out-of-sample forecasting exercise and show that the predictive power of AESTAR model for inflation is high for some countries in our sample, especially at long-horizons.

Date: 2015
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