DR. NEKTARIOS ASLANIDIS
A number of commentators and policy makers have argued that inflation targeting central banks are less aggressive in responding to shocks that push inflation below target than to shocks that push inflation above target (Thoma, 2012; Beckworth, 2016; Kashkar, 2017). Support for this claim is usually based on the observation that in a number of inflation targeting countries, recent inflation outcomes have been persistently below target, despite that fact that these countries have been experiencing growth rates below historical norms. For either a strict or flexible inflation targeting central bank, there is no trade‐off in terms of real activity to prevent it from doing what is necessary to increase the rate of inflation. In this paper we provide evidence of asymmetry in the time series process for inflation rates in five inflation targeting countries (Australia, New Zealand, Sweden, United States and the Euro‐Area). Of the countries we examine, only Canadian inflation shows no evidence of asymmetry. Since it is relatively standard to model inflation as an autoregressive process, we use a threshold autoregressive (TAR) model to test for asymmetry in inflation persistence; above and below some estimated threshold. We find the threshold estimates are reasonable in light of a central bank’s announced inflation target.
