Inflation Targeting, Aggregation, and Inflation Persistence: Evidence from Korean CPI Components

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.