10 August 2009

Working paper: Inflation Control Around the World

The Central Bank of Iceland has published its Working Paper no. 42, in which the author, Thorarinn G. Pétursson, Chief Economist of the Central Bank, discusses inflation control around the world and specifically why some countries are more successful in controlling inflation than others.

The paper, which is written in English and bears the title, “Inflation control around the world: Why are some countries more successful than others?” focuses on two important questions. The first is why inflation tends to be more volatile in some countries than in others, particularly in very small, open economies and emerging market economies. The empirical analysis suggests that the volatility of the risk premium in multilateral exchange rates, the degree of exchange rate pass-through to inflation, and monetary policy predictability play a key role in explaining the cross-country variation in inflation volatility. The second question centres on the explanation for the general decline in inflation volatility over the sample period. The empirical analysis confirms that the adoption of inflation targeting has played a critical role in this improvement, in addition to the three variables found important in the cross-country analysis.

The paper can be found on the website of the Central Bank of Iceland, www.sedlabanki.is, under this link: Central Bank of Iceland Working Paper no. 42.