Does inflation targeting matter for the behavior of inflation and output growth? Some regime-based evidence for Asian economies

Abstract

PurposeThis paper considers whether or not the introduction of inflation targeting impacts on the mean-reversion properties of inflation and output growth.Design/methodology/approachFocusing on eight Asian countries of which four are inflation-targeters, we employ a two-state Markov switching model which characterizes the behavior of inflation and output growth as regime-dependent based on periods of stationarity or non-stationarity.FindingsIn contrast to a literature that offers mixed findings, we find the presence of stationary inflation and output growth in one regime for all inflation targeting countries, except for South Korea which is characterized by stationary output growth in both regimes. In the cases of South Korea and Thailand, inflation targeting reduces the probability of inflation remaining in a non-stationary regime. Inflation targeting increases the probability of South Korea remaining in a regime of low persistence output growth. While inflation targeting is important in understanding behavior, so are other considerations such as exchange rate volatility, as well as the Asian and global financial crises.Originality/valueIn contrast to other unit root tests of inflation and output growth, a novelty of our approach is that we obtain new insights in terms of two concepts of stationarity that allow for inflation and output growth to switch between stationary and non-stationary regimes (partial stationarity), or between stationary regimes of differing degrees of persistence (varied stationarity)