Abstract
We investigate the time-series properties of the price level in advanced and emerging economies. We are motivated by the debate of whether central banks should accommodate past inflation shock under inflation targeting or reverse past inflation shock as with price-level targeting or average inflation targeting. We use time series data for G7 and E7 countries and examine the integration properties of their price level indices using alternative testing procedures. We find the price level dynamics in most countries are consistent with the “bygones are bygone” aspect of inflation targeting, a pattern consistent even in Canada, contrary to previous findings. Evidence of stationary price level is found only in Japan. For emerging countries, the deviation between the actual and implied prices based on the target rates is more extensive and continues to expand rapidly in some emerging markets.
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Notes
For example, Miskin and Schmidt-Hebbel (2007) finds that adopting an IT strategy has led to overall economic performance, while Lin and Ye (2007) find that inflation targeting has no significant effects on either the level or volatility of inflation in seven industrial countries. de Mendonça and Souza (2012) suggests the adoption of IT is an ideal monetary regime for develo** economies, but it does not represent an advantageous strategy for advanced economics. On the contrary, Samarina et al. (2014) finds no effect of inflation targeting for advanced economies but a significant negative effect on inflation targeting in emerging and develo** countries.
For Germany, France and Italy, since monetary policy in these countries is set by the European Central Bank, instead of using the price level for each individual country, we examine the price level of the Eurozone starting from January 1991, the start of the monetary union and when the European Central Bank adopted inflation targeting. Germany, France and Italy together account for over fifty percent of the GDP in the European Union and the Eurozone.
The only exception is Russia, where the CPI is only updated to March 2023 from BIS.
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Chen, Y., Serletis, A. Monetary Policy Strategies in Advanced and Emerging Economies. Open Econ Rev (2024). https://doi.org/10.1007/s11079-024-09751-y
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DOI: https://doi.org/10.1007/s11079-024-09751-y