Modeling the behaviour of inflation deviations from the target

Gregoriou, A. and Kontonikas, A. (2009) Modeling the behaviour of inflation deviations from the target. Economic Modelling, 26(1), pp. 90-95. (doi: 10.1016/j.econmod.2008.05.003)

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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.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Kontonikas, Professor Alexandros
Authors: Gregoriou, A., and Kontonikas, A.
Subjects:H Social Sciences > HB Economic Theory
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Modelling
ISSN:0264-9993
ISSN (Online):1873-6122
Published Online:26 June 2008

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