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Inflation Targeting, Aggregation, and Inflation Persistence: Evidence from Korean CPI Components
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- Authors
- Issue Date
- 2012-07
- Citation
- Seoul Journal of Economics, Vol.25 No.3, pp. 233-254
- Keywords
- Inflation persistence ; Sectoral inflation ; Aggregation ; Inflation targeting ; Monetary policy strategy ; Dynamic factor model
- Abstract
- This paper studies the impact of inflation targeting on the evolution
of inflation persistence and the effects of aggregation across expenditure
categories. For this purpose we use disaggregate quarterly data
on 12 major subcategories of the Korean CPI. We compare persistence
in a sample covering 1986Q1-1997Q2 with persistence under inflation
targeting between 1999Q1 and 2010Q2. The main results are threefold.
First, the persistence of headline inflation as well as most CPI
categories falls after the adoption of inflation targeting. Second, the
evidence points to a large cross-sectional heterogeneity in the degree
of inflation persistence. Third, while aggregation of heterogeneous
categories induces additional persistence in the early part of the
sample, a reverse aggregation effect is found in the second half: the
persistence of the aggregate CPI inflation rate is significantly smaller
than the average of persistence estimates across sectors. This is
consistent with the Bank of Korea effectively stabilizing aggregate
shocks under inflation targeting. Our paper provides the first evidence
of disaggregate inflation persistence for an Asian emerging market
economy.
- ISSN
- 1225-0279
- Language
- English
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