Do inflation targeting regimes reduce inflation uncertainty? : evidence from five industrilized and five emerging countries

Abstract

In this thesis, using a time-varying parameter model with GARCH specification, it was investigated whether there is a structural break in expected inflation and two types of inflation uncertainties –structural and impulse uncertainty- for five industrialized and five emerging countries after the implementation of inflation targeting. Many industrialized and emerging countries attempted to stabilize their price levels with the help of a monetary discipline satisfied by the features of inflation targeting. These regimes are thought to lower the uncertainties regarding inflation dynamics. This methodology allows decomposing two types of uncertainties and it was claimed that successful implementation of inflation targeting removes these uncertainties. Two types of tests were employed to detect this claim: A simple non-parametric test which examine whether the changes in the mean and the variance of expected inflation along with two types of inflation uncertainty are statistically significant; and a parametric test whether there has been a shift in mean or a shift in the trend for expected inflation and two types of uncertainties. Both non-parametric and parametric test results indicate that the inflation targeting regimes are particularly successful in reducing expected inflation while there is less evidence that implementation of inflation targeting reduce inflation uncertainty.