Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets
Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey
We explore the asymmetric behaviour of inflation around the target level for inflation-targeting emerging markets. 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, especially at long-horizons.
Keywords: Inflation; forecasting; nonlinear adjustment (search for similar items in EconPapers)
JEL-codes: C32 E37 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:tcb:wpaper:1342
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