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Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets

Kurmaş Akdoğan

Working Papers from Research and Monetary Policy Department, Central Bank of the Republic of Turkey

Abstract: 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)
Date: 2013
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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