The Impact of Monetary Strategies on Inflation Persistence

Abstract

We analyze the impact of price stability-oriented monetary strategies (inflation targeting-IT-and constraining exchange rate arrangements) on inflation persistence using a timevarying coefficients framework in a panel of 68 countries . We show that explicit IT has a stronger effect on taming inflation persistence than implicit IT and is effective even during and after the financial crisis. Regimes with the U.S. dollar as a reserve currency are less effective than those using the Euro; this effect correlates with the level of the reserve currency's inflation persistence. Further, we document the existence of structure in inflation persistence data. Our results are robust to differences in four well established inflation persistence measures and are not affected by existing structural breaks or the endogeneity of monetary strategies.

Asymmetric Dynamics of Inflation Inertia in Non-Eurozone European Countries

“…At this point, it has been emphasized that discrete monetary policies fail to manage the expectations of the society and therefore cause inflation inertia (Westelius 2005). On the contrary, it is seen that economies that build monetary policy by doing inflation targeting are more successful in struggling with inertia (Baxa et al 2015;Canarella and Miller 2016;Kocenda and Varga 2017).…”

Inflation persistence and monetary policy: DSGE‐VAR approach

“…In particular, the simple DSGE model, served as the prior economic information for a VAR model, is a New Keynesian one built with the nominal price friction only. Moreover, we compute various measures of persistence on the basis of the Bayesian DSGE‐VAR model, including the half‐life coefficient (Kocenda & Varga, 2018; Pivetta & Reis, 2007), the sum of autocorrelation coefficient for inflation (Fuhrer, 2011), the largest root of a companion matrix (Fanelli & Sorge, 2017; Kocenda & Varga, 2018; Pivetta & Reis, 2007). With respect to the macroeconomic time series data, we use U.S. real GDP, GDP deflator and Federal funds rate, and the data series are detrended and transformed to a quarterly basis if necessary and spanned from 1955:Q3 to 2021:Q3.…”