The Macroeconomic Performance of the Inflation Targeting Policy: An Approach Based on the Evolutionary Co-Spectral Analysis

Abstract

This paper proposes a new methodology to check the economic performance of a monetary policy and in particular the inflation targeting policy (ITP). The main idea of this work is to consider the ITP as economically efficient when it generates a stable monetary environment. The latter is considered as stable when a long-run equilibrium exists to which the paths of economic variables (inflation rate, interest rate and GDP growth) converge. The convergence of the variables' paths implies that these variables are more predictable and implies a lower degree of uncertainty in the economic environment. To measure the degree of convergence between economic variables, we propose, in this paper, a dynamic time-varying variable presented in the frequency approach named cohesion. This variable is estimated from the evolutionary co-spectral theory as defined by Priestley and Tong (1973) and Priestley (1988-1996). We apply this theory to the measure of cohesion presented by Croux et al (2001) to obtain a dynamic time-varying measure. In the last step of the study, we apply the Bai and Perron test (1998-2003b) to determine the change in the cohesion path. The results show that the implementation of the ITP generates a high degree of convergence between economic series that implies less uncertainty into the monetary environment. We conclude that the inflation targeting generates a stable monetary environment. This result allows us to conclude that the ITP is relevant in the case of industrialized countries.

The price stability under inflation targeting regime: An analysis with a new intermediate approach

“…In other words, the inflation rate has remained stable since the IT adoption. Our results confirm the findings of some studies such as Choi et al (2003), Gnec et al (2007), Ftiti (2010) − and showing that the IT policy succeeds its primary goal of achieving price stability. However, contrary to different other studies, -as in Huh (1996); Bernanke and Mihov (1998); Lane and Van Den Heuvel (1998); Bernanke et al (1999); Honda (2000)-we avoid confusion in the relationship between the IT policy and the path of the inflation rate.…”

“…The first one is an approach in absolute terms (time-series econometrics) which consists in comparing the evolution of economic aggregates before and after the implementation of this policy, i.e. only in countries which have adopted this policy -such as in Huh, (1996); Almeida and Goodhart, (1998); Bernanke and Mihov, (1998); Lane and Van Den Heuvel, (1998) ;Honda, (2000); Choi et al, (2003); Ftiti and Essaadi, (2008) ; Mollick et al, (2008), Ftiti, (2010, Tas (2012)-. The second kind of literature is based on an approach in relative terms (panel data econometrics) which consists in comparing performance of IT with performance of non-IT countries, such-as in Ball and Sheridan (2003), Wu (2004), Pétursson, (2004; Lin and Ye (2007), Angeriz and Arestis (2008), Ball (2010), Willard (2012).…”

Le Ciblage d’Inflation: Un Essai de Comparaison Internationale

“…Une grande stabilité des prix a été observée au niveau mondial, ces dernières années, et surtout dans les pays à ciblage d'inflation. Certains économistes l'expliquent par l'effet de l'introduction du ciblage d'inflation (Levin et al, 2004 ;Choi et al, 2003 ;Molick et al, 2008, Ftiti et al, 2008Ftiti, 2010). D'autres soutiennent l'hypothèse que le ciblage d'inflation n'est pas à l'origine de cette stabilité.…”