Examining the Success of the Central Banks in Inflation Targeting Countries: The Dynamics of Inflation Gap and the Institutional Characteristics

Omid Ardakani and N Kishor

MPRA Paper from University Library of Munich, Germany

Abstract: This paper analyzes the performance of central banks in 27 inflation targeting countries by examining their success in achieving their explicit inflation targets. For this purpose, we decompose the inflation gap, the difference between actual inflation and inflation target, into predictable and unpredictable components. We argue that the central banks are successful if the predictable component in the inflation gap diminishes over time. The predictable component of inflation gap is measured by the conditional mean of a time-varying autoregressive model. Our results find considerable heterogeneity in the success of these IT countries in achieving their targets at the start of this policy regime. Our findings also suggest that the central banks of the IT adopting countries started targeting inflation implicitly before becoming an explicit inflation targeter. The panel data analysis suggests that the relative success of these countries in reducing the gap is influenced by their institutional characteristics particularly by fiscal discipline and macroeconomic performance.

Keywords: Inflation targeting; inflation gap; predictability; time-varying autoregressive model; institutional characteristics (search for similar items in EconPapers)
JEL-codes: C32 C53 E31 E37 E52 E58 (search for similar items in EconPapers)
Date: 2014-09-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Related works:
Journal Article: Examining the success of the central banks in inflation targeting countries: the dynamics of the inflation gap and institutional characteristics (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:58402

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