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Asymmetric Behaviour of Inflation around the Target in Inflation‐Targeting Countries
Author(s) -
Akdoğan Kurmaş
Publication year - 2015
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/sjpe.12089
Subject(s) - economics , inflation (cosmology) , inflation targeting , monetary policy , autoregressive model , asymmetry , econometrics , sample (material) , monetary economics , central bank , physics , quantum mechanics , theoretical physics , thermodynamics
We explore the asymmetric behaviour of inflation around the target level for inflation‐targeting countries. 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 for some countries in our sample, especially at long‐horizons.