The transition period before the inflation targeting policy

Abstract

In this paper, we study the inflation dynamics in an industrial inflation-targeting country (New Zealand). Our objective is to check if the inflation targeting policy has a transition period or not. Loosely speaking, we try to give some response to the famous debate: if the inflation targeting is a framework or a simple monetaryrule. For this purpose, we use a frequency approach: Evolutionary Spectral Analysis, as defined by Priestley (1965-1996). Then, we detect endogenously a structuralbreak point in inflation series, by applying a non-parametric test. This is the first time that this method is used in the case of inflation-targeting countries. Our main finding is that the adoption of the inflation-targeting policy in New Zealand was characterized by a transition period before the adoption of this framework. This period was characterized by many radical reforms, which caused a structuralbreak in the New Zealand inflation series. These reforms were made to lead back the inflation close to the initial target. In addition, these reforms increased the transparency and the credibility of the monetary policy. We conclude from our frequency analysis that the inflation series becomes stable in long-term after the adoption of the inflation targeting. This can be a justification of the effectiveness of this policy to ensure the price stability.New Zealand; inflation targeting; spectral analysis and structural change