Working Papers,
Lund University, Department of Economics

Abstract: Several central banks have adopted inflation targets. The implementation of these targets is flexible; the central banks aim to meet the target over the long term but allow inflation to deviate from the target in the short-term in order to avoid unnecessary volatility in the real economy. In this paper, we propose modeling the degree of flexibility using an AFRIMA model. Under the assumption that the central bankers control the long-run inflation rates, the fractional integration order captures the flexibility of the inflation targets. A higher integration order is associated with a more flexible target. Several estimators of the fractional integration order have been proposed in the literature. Grassi and Magistris (2011) show that a state-based maximum likelihood estimator is superior to other estimators, but our simulations show that their finding is over-biased for a nearly non-stationary time series. We resolve this issue by using a Bayesian Monte Carlo Markov Chain (MCMC) estimator. Applying this estimator to inflation from six inflation-targeting countries for the period 1999M1 to 2013M3, we find that inflation is integrated of order 0.8 to 0.9 depending on the country. The inflation targets are thus implemented with a high degree of flexibility.

Keywords: fractional integration; inflation-targeting; state space model

JEL-codes: C32; E52

19 pages, November 28, 2013

Full text files

WP13_38.pdf  

Download statistics

• Lund University, Department of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Iker Arregui Alegria ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:lunewp:2013_038This page generated on 2024-09-13 22:16:10.