Modeling the behaviour of inflation deviations from the target |
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Authors: | Andros Gregoriou Alexandros Kontonikas |
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Institution: | 1. Brunel Business School, Economics and Finance Section, Brunel University, Uxbridge, Middlesex, UB8 39H, UK;2. Department of Economics, University of Glasgow, Adam Smith Building, Glasgow, G12 8RT, UK |
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Abstract: | This study tests for and models non-linearities in inflation deviations from the target in five OECD countries that adopted inflation targeting over the 1990s. Our tests reject the linearity hypothesis and we show that the exponential smooth transition autoregressive (ESTAR) model is capable of capturing the non-linear behavior of inflation misalignments. The extent of inflation deviations from the target varies across the OECD countries, with countries that consistently undershoot the target having a rapid adjustment process, whereas countries that overshoot the target have a slower revision back to equilibrium. Out-of-sample forecasts from the ESTAR model outperform the Markov regime-switching model. |
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Keywords: | E31 E52 C5 |
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