Inflation persistence and structural breaks: The experience of inflation targeting countries and the USA
Abstract
Purpose
The purpose of this paper is to report on a sequential three-stage analysis of inflation persistence using monthly data from 11 inflation targeting (IT) countries and, for comparison, the USA, a non-IT country with a history of credible monetary policy.
Design/methodology/approach
First, the authors estimate inflation persistence in a rolling-window fractional-integration setting using the semiparametric estimator suggested by Phillips (2007). Second, the authors use tests for unknown structural breaks as a means to identify effects of the regime switch and the global financial crisis on inflation persistence. The authors use the sequences of estimated persistence measures from the first stage as dependent variables in the Bai and Perron (2003) structural break tests. Finally, the authors reapply the Phillips (2007) estimator to the subsamples defined by the breaks.
Findings
Four countries (Canada, Iceland, Mexico, and South Korea) experience a structural break in inflation persistence that coincide with the implementation of the IT regime, and three IT countries (Sweden, Switzerland, and the UK), as well as the USA experience a structural break in inflation persistence that coincides with the global financial crisis.
Research limitations/implications
The authors find that in most cases the estimates of inflation persistence switch from mean-reversion nonstationarity to mean-reversion stationarity.
Practical implications
Monetary policy implications differ between pre- and post-global financial crisis.
Social implications
Global financial crisis affected the persistence of inflation rates.
Originality/value
First paper to consider the effect of the global financial crisis on inflation persistence.
Keywords
Citation
Canarella, G. and Miller, S.M. (2016), "Inflation persistence and structural breaks: The experience of inflation targeting countries and the USA", Journal of Economic Studies, Vol. 43 No. 6, pp. 980-1005. https://doi.org/10.1108/JES-10-2015-0190
Publisher
:Emerald Group Publishing Limited
Copyright © 2016, Emerald Group Publishing Limited