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Seoul Journal of Economics
[ Article ]
Seoul Journal of Economics - Vol. 25, No. 3, pp.233-254
ISSN: 1225-0279 (Print)
Print publication date 31 Aug 2012
Received 05 Mar 2012 Revised 09 Jul 2012 Accepted 16 Jul 2012

Inflation Targeting, Aggregation, and Inflation Persistence: Evidence from Korean CPI Components

Peter Tillmann
Professor, Department of Economics, Justus-Liebig-University Giessen, Licher Str. 66, 35394 Giessen, Germany, Tel: +49-641-99-22-170, Fax: +49-641-99-22-179 peter.tillmann@wirtschaft.uni-giessen.de

JEL Classification: C22, E5, E31

Abstract

This paper studies the impact of inflation targeting on the evolution of inflation persistence and the effects of aggregation across expenditure categories. For this purpose we use disaggregate quarterly data on 12 major subcategories of the Korean CPI. We compare persistence in a sample covering 1986Q1-1997Q2 with persistence under inflation targeting between 1999Q1 and 2010Q2. The main results are threefold. First, the persistence of headline inflation as well as most CPI categories falls after the adoption of inflation targeting. Second, the evidence points to a large cross-sectional heterogeneity in the degree of inflation persistence. Third, while aggregation of heterogeneous categories induces additional persistence in the early part of the sample, a “reverse aggregation effect” is found in the second half: the persistence of the aggregate CPI inflation rate is significantly smaller than the average of persistence estimates across sectors. This is consistent with the Bank of Korea effectively stabilizing aggregate shocks under inflation targeting. Our paper provides the first evidence of disaggregate inflation persistence for an Asian emerging market economy.

Keywords:

Inflation persistence, Sectoral inflation, Aggregation, Inflation targeting, Monetary policy strategy, Dynamic factor model

Acknowledgments

I thank Stefan Gerlach, Kum Hwa Oh, and two anonymous referees for very thoughtful comments on an earlier draft.

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