Effect of Inflation Targeting on Inflation Uncertainty: A SWARCH Analysis

Tas B. K. O., ERTUĞRUL H. M.

AUSTRALIAN ECONOMIC REVIEW, vol.46, no.4, pp.444-459, 2013 (SSCI) identifier identifier

  • Publication Type: Article / Article
  • Volume: 46 Issue: 4
  • Publication Date: 2013
  • Doi Number: 10.1111/1467-8462.12036
  • Journal Name: AUSTRALIAN ECONOMIC REVIEW
  • Journal Indexes: Social Sciences Citation Index (SSCI), Scopus
  • Page Numbers: pp.444-459
  • Anadolu University Affiliated: No

Abstract

We analyse the success of inflation targeting (IT) in decreasing inflation volatility by investigating inflation variance before and after IT. We contribute to the literature by implementing Markov-Switching AutoRegressive Conditional Heteroscedastic methodology to model inflation volatility. After determining the unbiased conditional variances of inflation in each inflation-targeting country, we investigate structural breaks in inflation variability by both analysing individual countries and conducting a panel data analysis. All of these methods conclude that IT helps most of the countries to achieve lower inflation uncertainty (volatility). We also examine the country-specific factors that determine the effectiveness of inflation-targeting adoption.