Does inflation targeting matter for inflation persistence?

Inflation targeting is a practice that central banks around the world began to adopt as early as 1990. Inflation targeting (IT) policy was expected to lead to success on three counts: (1) a decline in the level of inflation, (2) a reduction in the volatility of inflation, and (3) a decline in inflation persistence, as a central bank publicly announced its commitment to a target range for inflation. However, studies are divided over whether the three outcomes have been realized. Studies of inflation targeting to date have generally relied on variations of linear autoregressive models. However, there are no studies of inflation targeting to our knowledge that examine inflation persistence by using a model that allows for threshold non-linearity at the targeted inflation range. In this paper, we adapt a threshold autoregressive (TAR) model to study inflation persistence using a select sample of inflation targeters. We compare estimates of inflation persistence from a TAR model over the inflation targeting sample to estimates of persistence from a linear autoregressive model for the period prior to the adoption of inflation targeting. We further examine differences in inflation persistence across levels of development and for countries that have ever experienced hyperinflation. To address issues raised that events unrelated to inflation targeting policy could explain our findings, we include a select set of eight non-IT targeters in our study and conduct a counterfactual exercise. This study utilizes monthly data on the consumer price index (CPI) from (IMF’s) International Financial Statistics and Organization for Economic Co-Operation and Development (OECD)’s Statistics covering from January 1974 to October 2017. Our findings demonstrate that inflation targeting policy has yielded benefits to inflation performance. In other words, inflation targeting policy has positive effects on a decrease in inflation persistence.