Shades of inflation targeting: insights from fractional integration

Marek A. Dąbrowski, Jakub Janus and Krystian Mucha

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, we propose a novel approach to classifying inflation-targeting (IT) economies based on fractionally integrated processes. Motivated by the rising prevalence and diversity of IT strategies, we leverage variation in the persistence of inflation rate series to identify four de facto IT strategies, or ‘shades’ of IT. Moving from negative orders of fractional integration, indicating anti-persistent behaviour, to more persistent long-memory processes, often associated with less credible policy frameworks, we classify countries into average IT, strict IT, flexible IT, and uncommitted IT categories. This framework sheds light on the differences between declarative and actual monetary policy strategies across 36 advanced and emerging market economies. Notably, we demonstrate that while most economies fall into the flexible IT category, extreme cases, including the uncommitted IT category, occur with marked frequency. Furthermore, we link our IT classification to institutional features of national monetary frameworks using ordinal probit models. The results suggest that differences across IT categories are related to variations in the maturity and stability of IT frameworks, with less pronounced connections to central bank independence and transparency.

Keywords: inflation targeting; monetary policy strategy; central banking; inflation persistence; fractional integration (search for similar items in EconPapers)
JEL-codes: C22 E31 E52 E58 (search for similar items in EconPapers)
Date: 2025-01-09
New Economics Papers: this item is included in nep-cba, nep-inv and nep-mon
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