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How credible is inflation targeting in Asia? A quantile unit root perspective

Harold Glenn A. Valera, Mark Holmes () and Gazi Hassan ()

Economic Modelling, 2017, vol. 60, issue C, 194-210

Abstract: This article examines the dynamic behavior of the inflation rate for eight Asian countries using a quantile unit root test. We advocate a three-way definition of inflation targeting based on perfect, imperfect and zero credibility and advance the analysis by incorporating a fully-fledged adoption of inflation targeting. In doing so, we offer new insights by showing that the credibility of inflation targeting and the alternative monetary policy frameworks in Asia are imperfect, except for Malaysia and South Korea under a fully-fledged adoption of inflation targeting. In contrast to past studies that focus on the mean-reversion in inflation rates, we also consider trend-reversion and find that Asian inflation targeting countries have been building up their monetary policy credibility more than the non- inflation targeting countries in terms of a faster rate of decline in inflation rate changes. Our results generally indicate the presence of mean reversion at the lower quantiles only. Where stationarity is present, we find evidence of a varied speed of adjustment process across the quantiles. Finally, we determine the threshold levels whereby inflation becomes stationary and demonstrate that Asian inflation rates generally display stationary behavior during periods of inflation declining or slowing down.

Keywords: Quantile ADF regression model; Inflation targeting; Inflation persistence (search for similar items in EconPapers)
JEL-codes: C32 E31 E58 (search for similar items in EconPapers)
Date: 2017
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