Inflation targeting and inflation persistence in Asia–Pacific

Abstract

Following the Asian financial crisis in 1997–1998, a number of regional central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find that persistence tends to decline following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting show a smaller decline in persistence. Overall, we conclude that inflation targeting has performed well in Asia.