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An Empirical Study on the Effect of Inflation Targeting on PPP: Evidence From 19 OECD countries

물가안정목표제가 구매력평가에 미친 영향: 19개의 OECD 국가들을 대상으로

  • Eun-Son Lim (Division of International Commerce, Pukyong National University)
  • 임은선 (부경대학교 국제통상학부)
  • Received : 2022.09.16
  • Accepted : 2022.10.22
  • Published : 2022.10.30

Abstract

Purchasing Power Parity (hereafter, PPP) means the purchasing power of two currencies is the same when one is converted into the other one. According to previous studies on PPP, as the volatility of the real exchange rate is smaller, PPP may be more likely to hold. Since New Zealand adopted the inflation targeting policy in December 1989, many countries started to adopt it as their monetary policy frame. Previous studies on inflation targeting found that inflation targeting policy has positive effects on not only achieving price stability but also reducing the volatility of nominal/ real exchange rates. Therefore, in this study, I explored whether inflation targeting policy has positive effects on purchasing power parity subject to 19 OECD countries, applying an Exponential Smooth Transition Autoregressive (ESTAR) model during the sample periods, from 1974:Q1 to 2019:Q4. Based on the ESTAR estimate results, I found limited favorable evidence of PPP for only two countries- England and Switzerland- among 9 inflation targeters, compared to non-inflation targeters, and also I found that favorable evidence of PPP only for these two countries among 9 inflation targeters during post-inflation targeting, but not during pre-inflation targeting. These findings imply that the positive effects of inflation targeting on PPP may be questionable unlike Ding and Kim (2012) and Kim (2014)'s study.

Keywords

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