Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets
Title: |
Asymmetric Behaviour of Inflation around the Target in Inflation-Targeting Emerging Markets |
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Number: |
13/42 |
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Author(s): |
Kurmaş Akdoğan |
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Language: |
English |
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Date: |
November 2013 |
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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. |
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Keywords: |
Inflation, Forecasting, Nonlinear adjustment |
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JEL Codes: |
C32; E37 |