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Inflation Volatility and Activism of Monetary Policy

Shesadri Banerjee ()

No 2013_06, CEGAP Working Papers from Durham University Business School

Abstract: Dynamics of inflation features greater volatility in the developing economies compared to advanced countries. Following this stylised fact, the paper examines the role of monetary policy activism across the two groups. Reinforcing the New Keynesian (NK) tenets of active monetary policy for inflation stabilisation, First, the paper shows that inflation volatility is a decreasing function of the degree of policy activism. Second, it undertakes the Generalized Method of Moments (GMM) and Dynamic panel estimation of Taylor rules over the balanced panels of developing and advanced economies and provides evidence for the difference in the policy activism of the respective monetary authorities. It is found that inflation is actively and aggressively targeted by the monetary authorities of the advanced countries, but passively accommodated in the developing countries. This striking difference in the policy regimes between the two groups can be one of the factors for the difference in inflation volatility

Keywords: Inflation volatility; Taylor rule; Active monetary policy; Policy activism (search for similar items in EconPapers)
Date: 2013-06
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