DP7268 Assessing Inflation Persistence: Micro Evidence on an Inflation Targeting Economy

Author(s): Jan Babecký , Fabrizio Coricelli , Roman Horváth

Publication Date: April 2009

Keyword(s): inflation dynamics , inflation targeting , persistence

JEL(s): D40 , E31

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP7268.asp.asp

The paper provides an empirical analysis of inflation persistence in one of inflation targeting countries, the Czech Republic, using 412 detailed product-level consumer price indexes underlying the consumer basket over the period from 1994 to 2005. 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.