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Corresponding Author:
Georgios Karras, University of Illinois at Chicago, Illinois, USA

When is Lower Inflation less Stable? Evidence from Eight Developing Economies

Volume 70 - Issue 3, August 2017
(pp. 333-352)
JEL classification: E31, E32
Keywords: Inflation, Inflation Volatility, Trend Inflation

Abstract

This paper investigates the relationship between inflation and inflation volatility in eight developing economies. Using monthly data for Chile, China, India, Indonesia, Korea, Poland, South Africa, and Turkey, the results show that inflation and its volatility have been positively correlated when inflation exceeds a certain value, but negatively correlated when inflation is below this threshold. The evidence also suggests that inflation volatility is minimized at inflation rates that differ across the countries, ranging from roughly 3% in South Africa to 12% in Turkey, a range which includes both the 3.5% break point predicted by the New Keynesian model of Coibion et al. (2012) and the 4% inflation target recommended by Ball (2013) and Krugman (2013), but not the (formal or informal) 2% inflation target of many central banks.

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When is Lower Inflation less Stable? Evidence from Eight Developing Economies

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Institute for International Economics of the Genoa Chamber of Commerce

Institute for International Economics
of the Genoa Chamber of Commerce