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Volume 59, Issue 2

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Assessing Inflation Persistence: Micro Evidence on an Inflation Targeting Economy

Babecký, Jan; Coricelli, Fabrizio; Horváth, Roman

Year: 2009   Volume: 59   Issue: 2   Pages: 102-127

Abstract: The paper provides an empirical analysis of inflation persistence in one of the inflation targeting countries, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994:M1 to 2005:M12. Subject to various sensitivity tests, our results suggest that raw goods and non-durables, followed by services, display smaller inflation persistence than durables and processed goods. Inflation seems to be somewhat less persistent after the adoption of inflation targeting in 1998. There is also evidence for aggregation bias, that is, aggregate inflation is found to be more persistent than the underlying detailed components. Price dispersion, as a proxy for the degree of competition, is found to be negatively related to inflation persistence, suggesting that competition is not conducive to reducing persistence.

JEL classification: D40, E31

Keywords: inflation dynamics, persistence, inflation targeting

RePEc: http://ideas.repec.org/a/fau/fauart/v59y2009i2p102-127.html

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