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Changes in Inflation Dynamics under Inflation Targeting? Evidence from Central European Countries

Journal Article

Baxa Jaromír, Plašil M., Vašíček B.

serial: Economic Modelling vol.44, 1 (2015), p. 116-130

project(s): GBP402/12/G097, GA ČR

keywords: Bayesian model averaging, Central European countries, Inflation Dynamics

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abstract (eng):

Many countries have implemented inflation targeting in recent decades. At the same time, the international conditions have been favorable, so it is hard to assess to what extent the success in stabilizing inflation should be attributed to good luck and to what extent to the specific policy framework. In this paper, we provide a novel look at the dynamics of inflation under inflation targeting, focusing on three Central European (CE) countries that adopted the IT regime at similar times and in similar environments. We use the framework of the open economy New Keynesian Phillips curve (NKPC) with time-varying parameters and stochastic volatility to recover changes in price-setting and expectation formation behavior and volatility of shocks. We employ Bayesian model averaging to tackle the uncertainty in the selection of instrumental variables and to account for the possible country-specific nature of inflation dynamics.


bocek: 2012-12-21 16:10