International Review of Economics and Finance 91 (2024) 1015–1032

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International Review of Economics and Finance

journal homepage: www.elsevier.com/locate/iref

Does inflation targeting matter for price stability?

Minjie Guo a, b, Eun-Son Lim c, *
a
School of Public Finance and Taxation, Zhejiang University of Finance and Economics, Hangzhou, 310018, China
b
Key Research Center of Philosophy and Social Sciences of Zhejiang Province, The Institute of Local Finance Research, Zhejiang University of Finance
and Economics, Hangzhou, China
c
Division of International Commerce, College of Business Administration, Pukyong National University, 45 Yongso-ro, Nam-Gu, Busan, 48513,
South Korea

A R T I C L E I N F O A B S T R A C T

JEL classification: Since New Zealand embraced Inflation Targeting (IT) as a monetary policy in 1990, numerous
E31 countries have followed suit. The inherent high accountability and transparency associated with
E52 central banks operating under an IT policy are anticipated to facilitate the attainment of price
E58
stability. This study aims to investigate the potential positive impact of IT policy on price stability
Keywords: by examining whether its implementation results in shorter durations of High Inflation Episodes
Inflation targeting
(HIEs). HIEs are defined as periods during which a country experiences sustained and consecutive
Survival analysis
high inflation rates for a specific duration. We employ Survival Analysis with data spanning from
High inflation episodes
1980: Q1 to 2022: Q4 to explore this aspect.
Our research reveals a significant decline in the average duration of High Inflation Episodes
(HIEs) following the implementation of the Inflation Targeting (IT) policy. Furthermore, our
analysis indicates that, within countries employing inflation targeting, the period during which
inflation rates remain below the lower bound of the IT target range is comparatively shorter than
the duration above the upper bound. These findings imply that inflation targeting policies play a
crucial role in fostering price stability, even amid the backdrop of escalating inflation rates—a
phenomenon witnessed across various nations since the advent of the COVID-19 pandemic in
2020. Consequently, we assert that the IT policy effectively contributes to achieving price sta­
bility, a key objective of this monetary approach.

1. Introduction

In the pursuit of price stability, many countries adopted monetary targeting or exchange rate targeting policies before 1990.
However, these approaches proved ineffective in maintaining consistent price stability. Since the Central Bank of New Zealand
introduced a new monetary policy known as Inflation Targeting (hereafter referred to as IT) in1990,1 numerous countries, both
developed and less developed, have embraced IT as a means to achieve price stability. Under the IT policy, a central bank establishes an
inflation rate target, often around 2 %, with either a tolerance band (e.g., 2 % ± 1 %) or a target range (e.g., 2 % – 3 %). Whenever
actual inflation rates deviate from the target, the central bank takes corrective actions, primarily by adjusting interest rates, to realign

* Corresponding author.
E-mail addresses: [email protected] (M. Guo), [email protected] (E.-S. Lim).
1
Actually, New Zealand adopted Inflation Targeting in December 1989; however, most studies mentioned that 1990 is the year that New Zealand
adopted Inflation Targeting, and thus we follow them.

https://doi.org/10.1016/j.iref.2024.01.035
Received 29 January 2023; Received in revised form 22 December 2023; Accepted 17 January 2024
Available online 25 January 2024
1059-0560/© 2024 Elsevier Inc. All rights reserved.
M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

actual inflation with the target.

In contrast to other monetary policies, such as monetary targeting or exchange rate targeting, central banks under the Inflation
Targeting (IT) policy maintain a high level of transparency. They regularly release an “Inflation Report" that includes comprehensive
information about the IT policy, including the inflation target and the actions taken to achieve it. This transparency allows the public to
assess the central bank’s performance, increasing its accountability in achieving the inflation target (Nasir, 2020c). This, in turn, helps
anchor inflation expectations, reducing uncertainty about inflation among the population in countries that adopt inflation targeting
(Nasir et al., 2020d). Previous studies on IT (Bernanke et al., 2004; Morgan, 2009) underscores that the effectiveness of this framework
in upholding price stability derives from its inherent capacity to bolster the credibility of monetary policy, provide a clear blueprint for
policy execution, and guide forward-looking actions among economic agents. As a result, even when actual inflation rates diverge from
the target, they often exhibit a quicker return to the target when compared to other monetary policies. This characteristic contributes
to a more efficient achievement of price stability.
In general, when unexpected economic shocks occur, such as oil price spikes or events like the COVID-19 pandemic, inflation rates
can rise. However, if a central bank maintains a high level of credibility and effectively anchors inflation expectations, the increase in
inflation rates tends to be temporary. In other words, the period during which inflation rates remain elevated is typically short. Among
countries that have adopted Inflation Targeting (IT) policies, one can reasonably expect that even if inflation rates temporarily rise due
to an unexpected economic shock, the central banks’ effective management of inflation expectations, driven by their high credibility,
will ensure that this increase is short-lived.
Numerous previous studies have examined the impact of Inflation Targeting (IT) policy on price stability by analyzing inflation
performance like investigating whether IT policy has a positive influence on reducing both the level and the volatility of inflation rates,
as well as inflation persistence. Johnson (2002), Petursson (2004), and Vega and Winkelried (2005) have all provided evidence
supporting the idea that IT targeters tend to experience lower levels and reduced volatility in their inflation rates compared to non-IT
targeters. Additionally, Baxa et al. (2014), Bratsiotis et al. (2015), Canarella and Miller (2017), and Siklos (1999) have found that IT
policy has a favorable impact on reducing inflation persistence. However, there is currently no existing research that specifically
focuses on evaluating inflation performance in an economy, particularly during the extended episodes of high inflation under an IT
policy.
To address this research gap, our study aims to investigate whether the implementation of Inflation Targeting (IT) policy has led to
a reduction in the average duration of High Inflation Episodes (HIEs). In this context, a High Inflation Episode (HIE) is defined as a
period in which a country undergoes sustained and consecutive high inflation rates for a specific duration. Instead of solely focusing on
short-term fluctuations in inflation rates, our research is geared toward assessing the effectiveness of inflation targeting policy in
addressing situations where the economy grapples with extended periods of elevated inflation. Our paper delves into the policy’s
capacity to mitigate prolonged and potentially destabilizing episodes of inflation, providing a more comprehensive assessment of its
impact on price stability. These insights hold significant importance for policymakers, as they offer a deeper understanding of the
policy’s efficacy in safeguarding long-term economic stability and enhancing resilience against prolonged inflationary challenges.
Furthermore, previous studies (Akdogan, 2015; Martin & Milas, 2004; Ruge-Murcia, 2003) have explored whether central banks
respond differently in extreme scenarios characterized by excessively high or exceedingly low inflation rates. Generally, central banks
tend to prioritize alternative objectives, such as economic stability and unemployment rates, especially when inflation rates persist
below the lower target threshold, unlike situations when inflation rates are above the target threshold. As a result, we hypothesize that
the duration of inflation rates exceeding the upper bound, referred to as an upper violation episode (UVE), would tend to be shorter
than the duration of inflation rates falling below the lower bound, known as a lower violation episode (LVE). This expectation arises
from the notion that central banks are more likely to react promptly to instances of UVEs compared to occurrences of LVEs.
To examine changes in the duration of High Inflation Episodes (HIEs) and disparities between Upper Violation Episodes (UVEs) and
Lower Violation Episodes (LVEs) under the Inflation Targeting (IT) policy, we employ a novel methodology known as Survival Analysis.
Survival Analysis is a statistical method commonly used to analyze the expected duration of the impact of an event. We believe that
Survival Analysis is well-suited for investigating the effects of IT policy on the duration of HIEs and the differences between UVEs and
LVEs.
In August 2022, global inflation experienced a substantial surge, reaching a noteworthy 7.5 percent. This sharp increase stands in
stark contrast to the decade preceding the COVID-19 pandemic, during which the average inflation rate remained at a modest 2.1
percent.2 This remarkable rise in inflation rates raises concerns about the possibility of it becoming a persistent and enduring economic
phenomenon. Given this evolving economic landscape, our study takes on an analysis that encompasses the post-COVID-19 era. We
utilize quarterly data spanning from 1980:Q1 to 2022:Q4 to conduct a comprehensive examination of the overarching influence of
Inflation Targeting (IT) policy.
Our findings provide support for the effective impact of the Inflation Targeting (IT) policy in reducing the duration of high inflation
episodes (HIEs) after its implementation. Despite the heightened levels of general inflation observed across countries in the post-
COVID era, our findings underscore the crucial role of adopting an inflation targeting policy in contributing to the long-term price
stability of inflation-targeting countries. Furthermore, our study makes a significant contribution to the existing literature by exam­
ining the nuanced impact of Inflation Targeting (IT) policy on inflation dynamics within the context of the post-COVID-19 economic
environment.

2
https://www.researchgate.net/publication/366183495_Here_Comes_the_Change_The_Role_of_Global_and_Domestic_Factors_in_Post-_Pandemic_
Inflation_in_Europe.

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Contrary to our expectation, our results indicate that the duration of inflation rates staying below the lower bound of the IT target
bound is shorter compared to that above the upper bound, though this difference is not substantial. Additionally, our findings suggest
that, in comparison to less developed countries, developed countries are more efficient in maintaining the inflation rate within the
target band since the episodes of violated inflation, whether in terms of upper bound violation or lower bound violation, are shorter.
The structure of this study is as follows: Section II introduces the IT policy and reviews its relevant literatures, while Section III
presents data and conducts descriptive analysis. Section IV introduces the empirical model—Survival Analysis—and presents the
results. Finally, we offer our conclusions in Section V.

2. Inflation targeting policy and relevant literatures

Since the inception of IT policies across various countries, with New Zealand being the pioneer in 1990, researchers have conducted
extensive investigations into the impact of these policies on economies that prioritize controlling inflation. While the effects of IT
policies can be assessed from multiple perspectives, including their influence on output variability and unemployment, it is crucial to
underscore that the primary objective of these policies is to ensure price stability. Consequently, numerous previous studies have been
conducted to scrutinize how IT policies affect inflation performance, with the aim of assessing whether countries that employ inflation
targeting mechanisms successfully achieve the core objectives outlined in their respective IT policies.
Under IT policies, all information related to inflation targeting, such as the target inflation rate and the strategies central banks
employ to achieve it, is made accessible to the public. Accordingly, central banks are held to a high degree of accountability in their
pursuit of meeting the target inflation rate. Thanks to this high level of transparency and accountability inherent in IT policies,
prominent economists like Bernanke et al. (1999) and other researchers contend that countries practicing IT policy have been suc­
cessful in reducing the uncertainty surrounding inflation expectations following the implementation of IT policies. This reduction in
uncertainty potentially contributes to improved inflation performance.
Previous studies examining the impact of IT policy on inflation performance have predominantly focused on three key aspects: 1)
whether the average level of inflation rates has decreased. 2) whether the volatility of inflation has diminished. 3) whether there has
been a reduction in inflation persistence following the implementation of IT policy.
Several researchers, including Corbo et al. (2001), Levin et al. (2004), Lin and Ye (2009), Neumann and Von Hagen (2002), and
Petursson et al. (2004), have compared countries that adopted IT policies to non-inflation targeters that did not. Their findings indicate
that IT policy has had positive effects, resulting in a reduction in both the average level and the volatility of inflation. Additionally,
studies by Baxa et al. (2014), Bratsiotis et al. (2015), Siklos (1999), and Levin et al. (2004) have suggested that inflation becomes less
persistent among inflation targeters after the implementation of IT policy.
Our research takes a unique approach by examining inflation performance from a different angle compared to previous studies.
Specifically, we investigate whether the duration of high inflation episodes has been shortened, thereby indicating a positive impact of
IT policy on inflation performance. Under IT policy, central banks diligently strive to maintain inflation rates within a specified target
range by using a combination of monetary policy tools. Consequently, even in the face of economic shocks that might lead to temporary
increases in inflation rates, we anticipate that the duration of such high inflation episodes would be shorter following the adoption of IT
policy.
Several factors can influence inflation rates, including oil prices, exchange rates, and GDP or GDP growth rates (Nasir et al., 2018).
Le and Chang (2015) noted that an increase in oil prices exerts inflationary pressure on global markets, making imports more expensive
for both oil-importing and oil-exporting countries. A study focused on the Gulf Cooperation Council member countries by Nasir et al.
(2019) demonstrated significant positive effects of oil price shocks on inflation. However, it is worth noting that there are substantial
variations in the intensity of the impact of oil shocks on overall prices, suggesting that GCC monetary policies may face distinct
challenges in achieving price stability in the face of such shocks. Nasir et al. (2020c) investigated the link between oil price dynamics
and inflation expectations in New Zealand and the UK. In New Zealand (Jan 1994 – June 2017), positive oil price shocks boosted
inflation expectations, but this responsiveness decreased between April 2009 and June 2017(a proximal zero lower bound period). In
the UK (Jan 1999 – June 2018), oil price shocks influenced inflation expectations throughout, but during a proximal zero lower bound
(ZLB) situation (April 2009 – June 2019), there was downward pressure on inflation expectations, posing deflationary risks. Similarly,
Nasir et al. (2018) analyzed the implications of oil price shocks for the BRICS economies, and the study showed that the structure of
these economies makes the influence of oil shocks different for each country. Similar discussion can be found in the studies of Nasir
et al. (2020e).
Bahmani-Oskooee (1991), in an analysis spanning 20 developed and 76 less developed countries, found that exchange rate vari­
ability is another contributing factor to inflation variability in the current floating exchange rate system. According to Exchange Rate
Pass-Through (ERPT) theory, changes in exchange rates positively affect import prices, which can lead to an increase in inflation rates.
Previous studies by Dornbusch (1987), Feenstra et al. (1993), and Campa and Goldberg (2005) have concurred that exchange rate
increases are associated with higher inflation rates, albeit with varying degrees of ERPT across countries. In an examination of
ASEAN-5 countries, Pham et al. (2020) revealed that exchange rate shocks indeed lead to significant changes in inflation. Furthermore,
they provided evidence of asymmetric effects of exchange rate shocks in Singapore, the Philippines, and Indonesia, with varying results
observed among inflation-targeting and non-inflation targeting countries. Nasir and Vo (2020) found an increased ERPT under
inflation targeting, although there remains considerable heterogeneity in ERPT among New Zealand, the UK, and Canada under
analysis.
The relationship between GDP growth and inflation rates is not straightforward; however, some studies suggest a positive asso­
ciation between inflation rates and GDP growth at lower inflation levels, while a negative relationship is observed at higher inflation

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table 1
IT effective dates and inflation targets for 30 countries.
Country IT Effective Dates Inflation Target ( %) Country IT Effective Dates Inflation Target ( %)

Albania 2009. 1 2–4 South Korea 1998.4 1–3

Armenia, Rep. 2006.1 3–5 Mexico 2001.1 2–4
Australia 1993.6 2–3 Moldova, Rep. 2010.1 3.5 – 6.5
Brazil 1999.6 2.25 – 5.25 New Zealand 1989.12 1–3
Canada 1991.2 1–3 Norway 2001.3 1–3
Chile 1999.9 2–4 Peru 2002.1 1–3
Colombia 1999.10 2–4 Philippines 2002.1 2–4
Czech Rep. 1997.12 1–3 Poland, Rep. 1998.1 1.5 – 3.5
Georgia 2009.1 2–4 Romania 2005.8 1.5 – 3.5
Ghana 2007.1 6 - 10 Serbia, Rep. 2006.1 3.5 – 5.5
Guatemala 2005.1 3-5 South Africa 2000.2 3–6
Hungary 2001.6 2-4 Sweden 1995.1 2
Iceland 2001.3 2.5 Thailand 2000.5 1–3
Indonesia 2005.7 2-4 Turkey 2006.1 4–6
Israel 1997.1 1-3 United Kingdom 1992.10 1–3

rates. Mubarik (2005) estimated a threshold level of inflation for Pakistan using annual data from 1973 to 2000, employing a
Threshold Model. His findings indicated that inflation rates beyond 9 % had a detrimental impact on Pakistan’s economic growth,
implying that inflation rates below this estimated threshold were favorable for economic growth. Khan and Ssnhadji (2001) utilized
unbalanced panel data spanning 140 countries over the period 1960–1998 to estimate threshold levels for industrial and developing
countries, employing the nonlinear least squares (NLS) estimation method. They found a negative and significant relationship between
inflation and growth for inflation rates above threshold levels (1–3 % for industrial countries and 11–12 % for developing countries),
which held robust across different estimation methods. Munir and Mansur (2009) explored the relationship between inflation rates and
economic growth rates in Malaysia from 1970 to 2005, using a Threshold Autoregressive (TAR) model. Their research revealed a
non-linear relationship between inflation rates and economic growth; inflation rates over 3.89 % were associated with a retarded GDP
growth rate, whereas inflation rates below 3.89 % showed a positive correlation between inflation and GDP growth.
Given that previous studies have identified the effects of oil prices, exchange rates, and GDP growth on inflation rates, we anticipate
that these factors may also influence the duration of high inflation rate episodes. Accordingly, we investigate the impact of IT policy on
the duration of high inflation rate episodes, taking these factors into account.
In general, inflation targeters typically establish their inflation target goals as a range or a specific target point with a tolerance
band (e.g., 2 % ± 1 %), recognizing the challenges faced by central banks in achieving an exact point target level. Considering the
primary objective of Inflation Targeting (IT) policy, it is reasonable to anticipate that central banks may respond more swiftly to
instances of inflation overshooting rather than undershooting the predetermined inflation target range or tolerance band.
Several previous studies on IT policy have delved into the central banks’ asymmetric responses to inflation rates overshooting or
undershooting the defined target range or tolerance band. Research conducted by Akdogan (2015), Martin and Milas (2004), and
Ruge-MurciaFrancisco (2003) has indicated that inflation rate tends to be less persistent when it exceeds the target range or tolerance
band, as opposed to when it falls short. This suggests that central banks exhibit a more assertive response to inflation rate when it
exceeds expectations, possibly driven by greater concerns regarding elevated inflation rates as compared to lower ones. Consequently,
we also anticipate that the duration of high inflation episodes above the upper tolerance band would be shorter than those below the
lower tolerance band.

3. Data and descriptive analysis

We select thirty countries who adopted IT policy after 1990 in this study with the data availability. The data about inflation target
ranges or tolerance bands around a target level is collected from the respective central banks’ websites and relevant papers published.3
A list of countries selected for this study, along with their IT effective dates and latest inflation targets,4 is shown in Table 1.
We construct inflation rates using quarterly data from the Consumer Price Index (CPI, 2010 = 100) provided by the IMF’s Inter­
national Financial Statistics. Because inflation target rates are expressed on an annualized basis, we transform quarterly CPI data into
annualized inflation rates by taking the natural logarithm of the first difference in the CPI, as outlined below:
πt = 400 × {ln(CPIt ) − ln (CPIt− 1 )} (1)
We cover the data sample periods from 1980: Q1 to 2022: Q4 to investigate whether IT policy has positive effects on price stability.

3
See Table A in Appendix.
4
Actually, some countries such as Sweden recently set inflation target rate to be 2 %. In this paper, we define it to be 1 %–3 %, adding ± 1 % to
the range to generate the episode. One reason for this is even though the announced inflation rate is at a certain point, when the inflation rate moved
away from the target by more than 1 percentage point, central bank is required to send out open letter to the governor in charge explaining why and
how they are going to solve the problem.

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table 2
Change in the average of inflation rates between pre-and post-IT policy.
Country pre-IT post-IT t-statistics† Country pre-IT post-IT t-statistics†

Albania 17.72 1.92 2.94*** South Korea 6.85 2.27 5.68***

Armenia, Rep. of 59.61 3.61 2.43** Mexico 32.55 4.12 9.11***
Australia 6.61 2.44 8.91*** Moldova, Rep. of 50.46 5.56 2.62**
Brazil 134.54 6.09 9.28*** New Zealand 10.80 2.02 13.66***
Canada 6.10 1.77 10.13*** Norway 5.06 1.94 5.74***
Chile 14.60 3.11 10.43*** Peru 81.63 2.78 5.12***
Colombia 20.17 4.81 14.93*** Philippines 10.39 3.66 5.05***
Czech Rep. 11.23 2.42 7.29*** Poland, Rep. of 41.91 2.75 5.87***
Georgia 28.36 3.62 1.85* Romania 52.18 3.61 7.75***
Ghana 27.50 11.78 3.78*** Serbia, Rep. of 34.67 5.15 6.36***
Guatemala 11.01 4.65 4.24*** South Africa 11.21 5.15 9.25***
Hungary 13.85 3.59 7.43 Sweden 6.67 1.61 10.35***
Iceland 16.57 4.51 5.58*** Thailand 4.79 1.98 4.22***
Indonesia 10.09 5.68 2.64*** Turkey 42.00 9.18 10.71***
Israel 45.24 1.94 8.09*** United Kingdom 6.36 2.04 8.26***

Notes: 1) H0 † : ave πt pre− IT = ave π post−

t
IT
, where ave πt is the average of inflation rate.
2) ***p < 0.01, **p < 0.05, *p < 0.1.

Table 3
Change in the volatility of inflation rates between pre-and post-IT policy.
Country pre-IT post-IT F − statistics† Country pre-IT post-IT F − statistics†

Albania 34.53 8.54 16.32*** South Korea 7.11 2.18 10.61***

Armenia, Rep. of 170.31 11.16 232.68*** Mexico 26.89 2.77 94.62***
Australia 3.86 2.05 3.52*** Moldova, Rep. of 106.79 5.68 353.42***
Brazil 125.37 3.55 1.3e+03*** New Zealand 6.22 1.93 10.39***
Canada 3.15 2.09 2.26*** Norway 3.97 2.66 2.22***
Chile 9.40 3.09 9.22*** Peru 129.69 1.95 4400***
Colombia 8.44 3.68 5.25*** Philippines 10.93 2.84 14.84***
Czech Rep. 9.42 3.55 7.03*** Poland, Rep. of 62.13 3.42 330.33***
Georgia 87.14 7.31 142.15*** Romania 47.16 3.95 142.69***
Ghana 29.23 7.63 14.67*** Serbia, Rep. of 33.90 5.57 37.00***
Guatemala 11.19 3.47 10.39*** South Africa 4.63 3.57 1.68**
Hungary 11.36 3.71 9.38*** Sweden 4.51 4.20 4.19***
Iceland 18.27 4.30 18.08*** Thailand 4.66 3.69 1.60**
Indonesia 11.87 5.77 4.23*** Turkey 22.27 6.05 13.53***
Israel 50.88 4.02 160.40*** United Kingdom 4.83 1.76 7.54***

Notes: 1) H0 † : vol π t pre− IT = vol πpost−

t
IT
, where vol πt is the volatility of inflation rate.
2) ***p < 0.01, **p < 0.05, *p < 0.1.

Table 2 reports the average level of inflation rates for both pre-and post-IT policy. We see that the average inflation rates for
inflation targeters have reduced statistically and significantly after the implementation of IT policy. Also, we investigate whether the
volatility of inflation rates for thirty inflation targeters has changed after IT policy. As shown in Table 3, the volatility of inflation rates
for most thirty inflation targeters has reduced statistically at the significant level of 1 percent after IT policy. The findings presented in
both Tables 2 and 3 lend support for the positive effects of IT policy on inflation performance among inflation targeters.

4. Empirical analysis

4.1. Survival analysis

Survival Analysis is generally used to analyze the time to the occurrence of an event.5 In this paper, an event that we explore is the
occurrence of exiting the High Inflation Episode. Here, we define High Inflation Episode (hereafter, HIE) as the incident of sustaining
the high inflation rate for at least certain periods such as for certain months, quarters or years.
We utilize survival analysis to analyze the effect of Inflation Targeting on reducing the duration of HIEs by measuring the time to

5
It is commonly used in medicine to assess the effectiveness of a medication. This is done by measuring the number of subjects who survive or
show improvement after using the medication over a period of time and comparing them with a control group that only receives a placebo (see
Horwich et al., 1997; Lopez-Velez, & Perez-MolinaGuerreroBaqueroVillarrubiaEscribanoBellasPerez-CorralAlvar, 1998; Oh et al., 2004).

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table 4
Kaplan-Meier Estimates for HIEs (Total Sample Periods).
Time No. HIEs No. Exited No. Net Lost Survival Probability Standard Error [95 % Conf. Int.]

3 210 94 0 0.552 0.034 0.483 0.617

4 116 16 0 0.476 0.035 0.407 0.542
5 100 13 0 0.414 0.034 0.347 0.48
6 87 14 0 0.348 0.033 0.284 0.412
7 73 22 0 0.243 0.03 0.187 0.303
8 51 9 0 0.2 0.028 0.149 0.257
9 42 8 0 0.162 0.025 0.116 0.215
10 34 3 0 0.148 0.025 0.104 0.199
11 31 7 0 0.114 0.022 0.076 0.162
12 24 2 0 0.105 0.021 0.068 0.151
13 22 4 0 0.086 0.019 0.053 0.128
14 18 1 0 0.081 0.019 0.049 0.123
15 17 1 0 0.076 0.018 0.045 0.117
16 16 2 0 0.067 0.017 0.038 0.106
17 14 2 0 0.057 0.016 0.031 0.094
18 12 1 0 0.052 0.015 0.028 0.088
19 11 1 0 0.048 0.015 0.024 0.082
23 10 3 0 0.033 0.012 0.015 0.064
25 7 1 0 0.029 0.012 0.012 0.058
40 6 1 0 0.024 0.011 0.009 0.052
47 5 1 0 0.019 0.009 0.006 0.045
48 4 1 0 0.014 0.008 0.004 0.038
54 3 1 0 0.01 0.007 0.002 0.031
61 2 1 0 0.005 0.005 0 0.025
66 1 1 0 0 . . .

the occurrence of exiting the event (i.e. HIE). Under IT policy, most inflation targeters set the inflation target as a target level with a
tolerance band or a target range. In this study, “Survival” is defined as the status in which inflation rates remain higher than an upper
target level, rendering the current situation undesirable.6 In addition to “Survival”, we include another term “Exit”. “Exit” is defined as
the situation in which deviated inflation rates from the upper target level move back to the upper target level or fall below it, making it
a desirable outcome.
There are two reasons why OLS linear regression is not appropriate for analyzing questions of duration. First, the OLS linear
regression model assumes that the errors are normally distributed; however, it is unlikely for the distribution of the time-to-event. For
example, the instantaneous risk of exiting the HIEs may well be rising over time. Also, time-to-event may not be distributed sym­
metrically, and in this case, the results from the linear regression model are biased. Second, there could be the existence of right-
censoring in the data. Right-censoring refers to the fact that some countries still stayed in the high inflation episode in the last time
of available data in our sample, and if there were more time periods of data available, the actual duration of HIEs may be longer. This
happens frequently in duration data, and the OLS linear regression model cannot deal with it effectively, while survival analysis is the
most efficient way to analyze the episodic data according to our best knowledge.
In this study, we use both the non-parametric model and the semi-parametric model,7 specifically the Cox Proportional Hazards
model, which makes assumptions about the distribution patterns of baseline survival times. The Kaplan Meier (KM) model is one of the
best options to be used as a non-parametric method of duration analysis and is very useful for comparing the survival experience of a
limited number of groups, generally two, or characteristics that are constant over time. However, the Cox Proportional Hazards model
is used when covariates can take on several values and can change over time.

4.2. Non-parametric analysis: the Kaplan- Meier Model

First, we investigate the duration of HIEs, utilizing a Kaplan-Meier Model. The survival function, S(t) of the Kaplan-Meier Model is
without making any assumptions about its functional form in nature. The survival function shows the probability that the HIEs will last
to time, t, which is also the probability that the HIEs will end right after time, t. Before we move to the survival function, we need to
define two things concerning the HIEs: 1) the threshold value of high inflation rates, and 2) the least duration for high inflation ep­
isodes. We define the threshold value as 4.5 percent, which was arbitrarily selected by averaging all the upper bounds of the inflation
target range or tolerance bands from thirty inflation targeters in Table 1. This means that the inflation rate should be at least 4.5
percent. Generally, when a stationary time-series variable deviates from its average due to a temporal economic shock, it tends to
revert back to its mean. The half-life estimate for a time-series variable is used to estimate how long it takes for the effect of a temporal
economic shock to be reduced by half on that variable. Following the computation of half-life estimates for inflation rates across thirty

6
Studies using Survival Analysis show that the desirability of ‘Survival’ varies across different studies. For instance, Guo and McDermott (2020)
define ‘Survival’ as the situation where the economy remains in a negative growth episode, considering it also undesirable.
7
Survival Analysis consists of three types of models: non-parametric, semi-parametric, and parametric. In this study, we use both the non-
parametric model and the semi-parametric model, specifically, the Cox Proportional Hazards model.

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Fig. 1. Kaplan-Meier Estimates for HIEs.

Fig. 2. Kaplan-Meier Estimates for HIEs: Pre-IT vs Post-IT.

inflation-targeting entities, we have determined their collective average to be 3 quarters. Accordingly, we define a High Inflation
Episode (HIE) as a situation where a country’s inflation rates remain above 4.5 percent for at least 3 quarters.
The Kaplan-Meier estimate of the survival function time, t, is given by equation (2) as below:
∏ (hj − ej )
̂
S(t) = (2)
j|t ≤t
hj
j

The variable hj is the number of HIEs at time tj - that is, the total number of HIEs that are still ongoing at time tj . The value of ej is the
number of HIEs that exit naturally during time tj . In particular, the value of ej excludes those episodes that are right-censored at time tj .
The estimate ̂
S(t) is the multiplication of all the conditional probabilities of surviving at each observed tj for tj ≤ t. At any time tj , one or
more countries could exit the HIEs.
Table 4 displays the detailed output for the Kaplan-Meier estimates for all of the HIEs among 30 inflation targeters. There are 210
HIEs in total for the sample periods from 1980: Q1 to 2022: Q4. In other words, the number of HIEs, during which the inflation rates are
4.5 percent or over and last for at least 3 quarters is 210. Accordingly, we conducted the analysis using all 210 High Inflation Episodes
(HIEs) obtained from 30 inflation targeters. Since the minimum requirement for HIEs is 3 quarters, the observed minimum exit time t is
3 as shown in Table 4. In the beginning of third quarter, 210 HIEs are still ongoing (listed in the column titled “No. HIEs”). Over the
lapse of 3 quarters, 94 of them exit the high inflation state and this is noted as “No. Exited” in Table 4. “No. Net Lost8” displays the

8
In medicine, “Net Lost” typically refers to the number of patients who discontinue treatment or cannot be tracked because they simply disappear
without notice. However, our study does not lose any data on High Inflation Episodes (HIEs), so the “No. Net Lost” for all time periods is “zero”.

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Table 5
Mean and median of duration of HIEs (4.5 %): Pre-IT vs Post-IT.
Pre-IT Post- IT Total Sample Periods

Median 7 3 4
(4, 7) (3, 4) (3, 5)

Mean 11.021 4.731 7.229

(8.091, 13.952) (4.221, 5.240) (6.016, 8.441)

No. obs 103 119 210

Note: The numbers in parentheses represent the 95 % confidence level.

Table 6
Significance tests for equality of Kaplan-Meier Survival Function (4.5 %): Pre-IT vs Post-IT.
IT Policy Event Observed Event Expected

Pre-IT 91 125.07
Post-IT 119 84.93
Total 210 210

Log-Rank Test Wilcoxon Test

x2 (1) = 36.85 x2 (1) = 23.69
Pr > x2 = 0.000 Pr > x2 = 0.000

number of right-censored episodes in the third quarter. The corresponding estimated survival probability is ̂ S(3) = 210− 94
210 ≈ 0.55.
When time is four, “No. HIEs” is 116, which is calculated from 210 − 94 and “No. Exited” is 16. The corresponding estimated survival
( )
S(4) = 0.55 ∗ 116− 16 ≈ 0.476. We interpret this number as follows: the probability of remaining in high inflation
probability is ̂ 116
episode at t = 4 is 47.6 percent. The last row of Table 4 shows that time is 66, which means that the observed maximum duration of the
HIEs among 30 inflation targeters is 66 quarters (16.5 years) which is from Mexico. The last three columns of Table 4 provide the
standard error and confidence interval for the Kaplan-Meier estimates. As time progresses, the estimated survival probability de­
creases, indicating that high inflation episodes experienced by all 30 inflation targeters eventually come to an end. Fig. 1 shows the
declining estimated probability ̂ S(t) over time. At the bottom of Fig. 1, we display the number of high inflation episodes at those
specific time spots.
We are primarily interested in whether inflation targeting policy has a positive effect on reducing the duration of the high inflation
episodes. To explore this question, we divided our samples into two periods, pre- and post-IT policy, and estimated ̂S(t). Fig. 2 displays
the exit speeds of inflation targeters for the pre- and post-IT policy periods. The blue line (solid line) represents high inflation episodes
for the pre-IT policy, and the red line (dash line) represents high inflation episodes for the post-IT policy. The blue line (solid line) is
above the red line (dash line), indicating that the probability of remaining in high inflation episodes is higher for the pre-IT policy
period than for the post-IT policy period. In other words, inflation targeters exit high inflation episodes faster during the post-IT policy
period. These results suggest that IT policy has a positive effect on reducing the duration of high inflation episodes.
Additionally, the information of the Kaplan-Meier model is numerically summarized by the median and mean of survival times. The
median survival time is defined as follows:
{ ⃒
̂t(50) = min tj ⃒̂s (t) ≤ 0.5} (3)

It indicates the number of quarters after which exactly 50 percent of the episodes are expected to remain in high inflation episodes.
The mean survival time μt is defined as follows:
∫ tmax
μt = ̂s (t)dt (4)
0

where tmax is the observed maximum survival time.

Table 5 shows that the median and mean duration of High Inflation Episodes (HIEs) appear to decrease after the implementation of
the IT policy. We have observed a difference between the sums of HIEs for the pre- and post- IT policy periods (103 and 119,
respectively) and the total number of HIEs across all sample periods (210). The difference arises from the 12 HIEs of certain inflation
targeters that adopted the IT policy while still remaining in high inflation episodes.9
To determine whether the median and mean durations of HIEs significantly decrease after the IT policy, we perform the Log-Rank test

9
As shown in Table 1, the effective dates of Inflation Targeting (IT) policies vary among different countries. Some countries adopted IT policy
while they were experiencing high inflation, meaning they adopted IT policy while still in high inflation episodes. As a result, the High Inflation
Episodes (HIEs) that occurred during these special moments were counted in both the Pre-IT and Post-IT periods. In our sample, there are 103 HIEs
for the pre-IT policy period, 119 HIEs for the post-IT policy period, and 12 HIEs that are counted in both. Therefore, the total number of HIE
observations for the entire sample period is 103 + 119 - 12 = 210.

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Table 7
Mean and median of duration of HIEs (6.5 %): Pre-IT vs Post-IT.
Pre-IT Post-IT Total Sample Periods

Median 6 3 5
(6,7) (3,5) (4,6)

Mean 12.081 4.340 9.080

(8.917, 15.245) (3.890, 4.791) (7.105, 11.166)

No. Obs 110 59 162

Table 8
Significance test for equality of Kaplan-Meier Survival Function (6.5 %): Pre-IT vs Post-IT.
IT Policy Observed Events Expected Events

Pre-IT 103 128.61

Post-IT 59 33.39
Total 162 162

Log-Rank Test Wilcoxon Test

x2 (1) = 37.06 x2 (1) = 26.38
Pr > x2 = 0.000 Pr > x2 = 0.000

Table 9
Mean and median of duration of HIEs (10 %): Pre-IT vs Post-IT.
Pre-IT Post-IT Total Sample Periods

Median 6 3 5
(5,7) (3,4) (4,6)

Mean 10.773 4.3 9.127

(7.666, 13.880) (3. 554, 5.046) (6.747, 11.507)

No. obs 89 30 118

and the Wilcoxon test. Both the Log-Rank test and the Wilcoxon test compare the overall equality of the two survival functions. The main
difference between the two lies in the weighting of the test statistics: the Log-Rank test emphasizes differences at larger values of time,
while the Wilcoxon test places more weight on smaller time values. Table 6 reports the results of the Log-Rank test and the Wilcoxon test.
The “Event Observed” refers to the number of HIEs observed. There are 91 observed HIEs for pre-IT policy, and 119 observed HIEs for post-
IT policy. The “Event Expected” represents the total number of events that would be observed if the two groups share the same survival
function. In Table 6, the substantial difference between the observed events and the expected events results in a significant p-value of 0.00
for the χ 2 − test with one degree of freedom. This leads to the rejection of the null hypothesis that two survival functions for pre- and post-
IT policy are equal. In other words, the statistical significance of the difference in the equality of the Kaplan-Meier (KM) survival function
suggests that the median and mean durations of High Inflation Episodes (HIEs) between pre- and post-IT policy, as shown in Table 5, are
different. Specifically, both the median and mean durations have reduced after the IT policy.
As we mentioned above, the threshold value of HIEs, 4.5 %, is arbitrarily selected by using the average of all the upper bounds of the
inflation target range or a tolerance band among thirty inflation targeters in Table 1. We also consider alternative threshold values for
HIEs – 10 % and 6.5 %. These values represent the first and second highest upper bounds in the target ranges among the thirty inflation
targeters. This provides additional justification for our research. Similar to the findings using 4.5 % as the threshold value for HIEs, the
results from using two other threshold values, 6.5 % and 10 %, also support the positive effects of IT policy on reducing the duration of
HIEs. These results are presented in Table 7 to Table 10.

4.3. Semi-parametric analysis: the Cox-Proportional Hazards Model

The Kaplan-Meier technique is valuable for comparing the survival experience of groups or covariates that remain constant over
time. When covariates can take on multiple values or change over time, the use of a parametric model becomes necessary. The semi-
parametric models utilize the hazard function, h(t). The hazard function presents the instantaneous rate of “failure” – exiting the HIEs-
at time t, given that the country has been in the HIEs for t-periods. The hazard function is defined to be the negative of rate of change in
s(t)
The standard technique is the Cox Proportional Hazards (PH) model10, which enables us
˙
the survivor function over time: h(t) = − s(t).
to analyze the relative effects of multiple covariates on the probability of exiting HIEs. This is particularly useful when these covariates
can change over time. The hazard function is assumed to have the following form:

10
See Cox (1972).

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Table 10
Significance test for equality of Kaplan-Meier Survival Function (10 %): Pre-IT vs Post-IT.
IT Policy Observed Events Expected Events

Pre-IT 88 100.97
Post-IT 30 17.03
Total 118 118

Log-Rank Test Wilcoxon Test

x2 (1) = 16.85 x2 (1) = 12.94
Pr > x2 = 0.000 Pr > x2 = 0.000

h(t|xi , x− i ) = h0 (t)exp (XB) (5)

where B is a coefficient vector and X is a matrix of covariates, which includes the core variable, xi (post-IT or not) and other control
variates, x− i (i.e. high income, development level of the country, exchange rate volatility, exchange rates, world inflation, real GDP
growth rate and oil price). h0 (t) is called “the baseline hazard function” because it represents the probability of exiting HIEs at time t
when all the covariates are equal to zero. The h0 (t) function can take various functional forms with respect to time, but it must adhere
to the condition that h0 (t) ≥ 0, as the probability of exiting HIEs should always be non-negative. The functional form of exp (XB)
ensures that the hazard function remains non-negative over time. This definition of the hazard function makes hazard rates propor­
tional to h0 (t) across different covariate values and it eliminates the need to make assumptions about the functional form of h0 (t). It is
one of the advantages of the Cox- Proportional Hazards Model. As a result, we cannot mis-specify the baseline hazard, but we are
limited to estimating only relative hazards as we will demonstrate next.
We estimate the coefficients in equation (5) by maximizing the log form of the partial likelihood function. Table 11 presents the
estimated coefficients ̂ β for the two baseline regressors (Table 11(a)) and the estimated hazard ratios eβ̂ (Table 11 (b)) with a threshold
value of 4.5 % for HIEs. Our primary focus is on the IT dummy variable. Additionally, considering the findings of previous studies
(Canarella & Miller, 2017; Lin, & Ye, 2007/2009) that suggest differences in the effects of IT policy on inflation performance between
developed and less developed countries, we control for the level of development using a “High Income” dummy variable. Furthermore,
we include control variables such as exchange rate volatility, real GDP growth rate, the level of world inflation, and oil price which are
known to affect inflation performance.
In Table 11(a), the coefficient on the IT dummy in column (1) is 0.740, representing the estimated probability that a country exits
HIEs at time t when compared to the base group. The detail is represented as below:
h(t|IT dummy) = h0 (t)exp (0.740 IT dummy)
Since IT dummy is dichotomous, the probability of exiting a HIE for a country under Inflation Targeting policy (IT dummy = 1) is as
following:
h(t|IT dummy = 1) = h0 (t)exp (0.740)
On the contrary, the probability of exiting a HIE for a country that it does not implement Inflation Targeting policy, yet (IT dummy
= 0) is as following:
h(t|IT dummy = 0) = h0 (t)exp(0)
It follows that the relative exit probability between two groups-the hazard ratio-is as below:

̂ ≡ h(t|IT dummy = 1) = exp(0.740) = 2.096

H
h(t|IT dummy = 0)
The hazard rate is higher for the group with IT dummy = 1, and the value is 2.096. It implies that it is close to twice as likely that a
country exits a high inflation episode when it implements inflation targeting policy compared to before it implements inflation tar­
geting policy. The coefficient is statistically significant within the 1 percent confidence interval. The coefficient for “High Income” is
0.034, suggesting that if an inflation targeter is a developed country, there is a 1.035 percent higher probability of exiting a high
inflation episode compared to a less-developed country. However, this result is not statistically significant, meaning the estimate is too
uncertain to draw a reliable conclusion.
According to previous studies on exchange rate pass-through, exchange rate volatility affects inflation rates, positively (Dornbusch,
1987; Feenstra, 1989; Feenstra et al., 1993; Kreinin, 1977), and thus we investigate whether exchange rate volatility has negative
influences on the probability of exiting HIEs. The coefficient for exchange rate volatility is − 0.015 at the significant level of 1 percent,
the corresponding hazard ratio is 0.985. Since 0.985 is less than 1, it suggests that as exchange rate volatility increases, the likelihood
of exiting High Inflation Episodes (HIEs) decreases. In other words, higher exchange rate volatility is associated with a longer duration
of HIEs. However, since the 0.985 is really close to 1, it means that the difference is not big in scale.
Furthermore, as certain studies contend that world inflation, GDP growth rate, and oil prices may have a positive impact on
inflation rates, we have included world inflation, real GDP growth rate, and oil price as control variables in our analysis. The results
reveal that the coefficients for world inflation, real GDP growth rate (− 0.039 and − 0.0003, respectively) and the corresponding hazard
ratios (0.962 and 1.000) are not statistically significant. It suggests that as world inflation and real GDP growth rates increase, the

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 M. Guo and E.-S. Lim
Table 11
Baseline Cox Proportional Hazards Models (The threshold value of HIEs: 4.5 %).
(a)Coefficient (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

IT Dummy 0.740*** 0.742*** 0.556*** 0.529*** 0.511** 0.618*** 0.583** 0.284 0.049 0.011
High Income 0.034
World Inflation − 0.039 0.006 0.001 − 0.003
Exchange rate Volatility − 0.015*** − 0.017*** − 0.0157*** − 0.016***
Real GDP Growth Rate − 0.0003 0.0007 0.001 0.001
WTI Oil Price 0.00087 0.00036
Brent Oil Price 0.001 0.001
Exits 210 210 202 194 119 185 185 111 103 103
N 1518 1518 1464 1469 700 1217 1217 669 596 596
1025

(b)Hazard Ratios (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

exp(IT Dummy) 2.096*** 2.101*** 1.744*** 1.670*** 1.667** 1.855*** 1.791** 1.329 1.05 1.011
exp(High Income) 1.035
exp(World Inflation) 0.962 1.006 1.001 0.997
exp(Exchange rate Volatility) 0.985*** 0.983*** 0.984*** 0.984***

International Review of Economics and Finance 91 (2024) 1015–1032

exp(Real GDP Growth Rate) 1 1.0001 1.001 1.001
exp(WTI Oil Price) 1.00087 1.000363
exp(Brent Oil Price) 1.001 1.001

Exits 210 210 202 194 119 185 185 111 103 103
N 1518 1518 1464 1469 700 1217 1217 669 596 596

Note: ***p < 0.01, **p < 0.05, *p < 0.10.

M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table 12
Baseline Cox Proportional Hazards Models (The threshold value of HIEs: 6.5 %).
(a)Coefficient (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

IT Dummy 0.911*** 0.928*** 0.675*** 0.530*** 0.749*** 0.544** 0.515** 0.342 0.342 0.307
High Income 0.078
World Inflation − 0.073** − 0.008 0.028 0.0221
Exchange rate − 0.016*** − 0.023*** − 0.021*** − 0.021***
Volatility
Real GDP Growth Rate 0.003 0.004 0.006 0.006
WTI Oil Price − 0.0007 − 0.005
Brent Oil Price 0.00016 − 0.004
Exits 162 162 157 152 79 130 130 74 65 65
N 1480 1480 1430 1368 475 900 900 441 375 375

(b)Hazard Ratios (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

exp(IT Dummy) 2.487*** 2.530*** 1.965*** 1.699*** 2.114*** 1.723** 1.674** 1.409 1.408 1.359
exp(High Income) 1.081
exp(World Inflation) 0.930** 0.992 1.028 1.022
exp(Exchange rate Volatility) 0.984*** 0.976*** 0.979*** 0.979***
exp(Real GDP Growth Rate) 1.003 1.004 1.006 1.006
exp(WTI Oil Price) 0.999 0.995
exp(Brent Oil Price) 1 0.996

Exits 162 162 157 152 79 130 130 74 65 65

N 1480 1480 1430 1368 475 900 900 441 375 375

Note: ***p < 0.01, **p < 0.05, *p < 0.10.

probability of existing HIEs is higher, but it is too imprecisely estimated to make an inference. Similarly, the coefficients for two oil
prices, WTI and Brent oil price, are 0.00087 and 0.0015, with corresponding hazard ratios of 1.00087 and 1.001, respectively.
However, it is important to note that these coefficients are not statistically significant. The results suggest that as both oil prices in­
crease, the probability of remaining in HIEs is higher. Nevertheless, the estimates are not statistically significant.
We have investigated how the control variables affect the probability of the existence of HIEs as in previous studies. Our findings
suggest that even when inflation rates are influenced by factors such as increased oil prices, real GDP growth rates, and world inflation,
these factors do not significantly affect the duration of HIEs. When we add all control variables at once in the regression, only the
coefficient of exchange rate volatility among control variables, − 0.017, is statistically significant within the 1 percent confidence
interval, and it means that the probability of exiting high inflation episode is negatively associated with exchange rate volatility. These
results suggest that Inflation Targeting policy has positive effects on exiting HIEs for inflation targeters, and also the probability of
existing HIEs is associated with exchange rate volatility, positively. However, other variables such as High Income, real GDP growth
rate, oil price and world inflation do not affect the probability of existing HIEs.
Looking at all the coefficients of IT dummy from column (1) to (7) in Table 11, we see that adding control variables including High
Income, exchange rate volatility, real GDP growth rate, world inflation and WTI/Brent oil price individually into the regression has
small influences on the coefficient of IT dummy.
The coefficients for IT dummy remain similar to each other and are all statistically significant across all the regression models.
However, when we include all the control variables, the findings reveal lower values for the coefficients of the IT dummy variable, as
indicated in column (8) to (10) of Table 11, and these coefficients are not statistically significant. This observation may result from the
relatively smaller number of observations available for regressions in column (8) to (10).11
We did the same analysis with alternative HIEs using 6.5 % and 10 % as threshold value, and report the results in Table 12 and
Table 13, respectively. The findings with the threshold value of HIEs, 6.5 % in Table 12 are similar to the findings with the threshold
value of HIEs, 4.5 % in Table 11. That is, except for exchange rate volatility, other controls do not affect the probability of exiting HIEs.
Similar to the findings in Table 11, when we include all the control variables, the coefficients of IT dummy tend to be reduced. To be
specific, the hazard ratio for the IT dummy variable, when no control variables are included, stands at 2.487. However, when all
control variables are considered, the hazard ratios for the IT dummy variable become 1.409, 1.408, and 1.359, respectively. This
variation is contingent on whether or not oil prices, including WTI oil price and Brent oil price, are included in the analysis as presented
in Table 12. Even though the hazard ratio decreases a little bit when including all the control variables, the findings still imply that it is
over twice as likely that a country exits a high inflation episode when it implements inflation targeting policy compared to before it
implements inflation targeting policy.
Table 13 displays the findings when the threshold value of HIEs is 10 %. Overall, it shows that there are positive effects of IT policy
on the probability of exiting HIEs, and it implies that it is close to twice as likely that a country exits a high inflation episode when it
implements IT policy compared to before it implements IT policy. Nonetheless, when we incorporate the real GDP growth rate in the
regression analysis (as indicated in column (5) of Table 13) and introduce additional control variables beyond the two oil prices (as

11
Adding additional control variables as shown in column (8) to column (10) of Table 11 has resulted in a substantial reduction in the number of
available observations.

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table 13
Baseline Cox Proportional Hazards Models (The threshold value of HIEs: 10 %).
(a)Coefficient (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

IT Dummy 0.782*** 0.898*** 0.620*** 0.444* 0.462 0.228 0.215 0.051 − 0.128 − 0.074
High Income 0.261
World Inflation − 0.061 − 0.011 − 0.038 − 0.033
Exchange rate Volatility − 0.012*** − 0.008 − 0.008 − 0.008
Real GDP Growth Rate 0.002 0.004 0.002 0.002
WTI Oil Price 0.004 0.0017
Brent Oil Price 0.004 0.0007
Exits 118 118 115 112 44 88 88 40 37 37
N 1077 1077 1034 992 244 633 633 216 203 203

(b)Hazard Ratios (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

exp(IT Dummy) 2.186**** 2.288*** 1.858*** 1.559* 1.587 1.256 1.24 1.052 0.88 0.929
exp(High Income) 1.298
exp(World Inflation) 0.941 0.989 0.962 0.968
exp(Exchange rate Volatility) 0.988*** 0.992 0.992 0.992
exp(Real GDP Growth Rate) 1.001 1.004 1.002 1.002
exp(WTI Oil Price) 1.004 1.002
exp(Brent Oil Price) 1.004 1.0007

Exits 118 118 115 42 44 88 88 40 37 37

N 1077 1077 1034 243 244 633 633 216 203 203

Note: ***p < 0.01, **p < 0.05, *p < 0.10.

presented in column (8) of Table 13), the findings do not demonstrate statistically significant positive effects of IT policy on reducing
the duration of HIEs. This lack of significance may be attributed to the relatively small number of observations. Additionally, when we
include each of the two oil prices, as shown in columns (9) and (10) of Table 13, the coefficients of the IT policy dummy variable are
negative and remain statistically insignificant.
As indicated in Table 11 through Table 13, our findings substantiate that IT policy has positive influences on the probability of
exiting high inflation episodes. This implies that the duration of HIEs would be shorter following the implementation of IT policy.
Additionally, among the control variables influencing inflation rates, exchange rate volatility is shown to affect the probability of
exiting HIEs, i.e., high exchange rate volatility is linked to longer duration of HIEs, while other control variables, apart from exchange
rate volatility, do not have a significant impact on it.

4.4. Different behaviors of inflation rates: above the upper bound vs below the lower bound

4.4.1. The definition of upper violation episode and lower violation episode
In light of the principal objective of inflation targeting, it is observed that when actual inflation rates surpass the upper bound of an
inflation target band or a tolerance band, they tend to return to the inflation target band at a swifter rate compared to instances where
they fall below the lower bound. Studies conducted by Akdogan (2015), Martin and Milas (2004), and Ruge-MurciaFrancisco (2003)
have delved into these phenomena by assessing variations in inflation persistence between situations where inflation is below or above
a target range (or a tolerance band), employing non-linear time-series models. Unlike them, our research approach focuses on
measuring the duration for which inflation rates deviate from either the upper bound or the lower bound, utilizing Survival Analysis.
By examining the asymmetric behavior of inflation rates concerning deviations above the upper bound and below the lower bound,
we can investigate whether there exists asymmetric responsiveness by the central bank towards the two types of violation under the IT
policy-specifically, upper violation episodes (UVEs) and lower violation episodes (LVEs). We define an upper violation episode (UVE) as a
period during which inflation rates persistently remain higher than the officially announced upper bound of the inflation target.
Consequently, the threshold value for identifying an upper violation episode is set at the upper bound of the inflation target. In contrast
to our approach in the previous section, we do not impose any minimum duration requirement for an UVE to maximum our sample
sizes as many as possible.12 Similar to how we define UVEs, we also define a lower violation episode (LVE) as periods in which inflation
rates persistently remain below the lower bound of the inflation target range or tolerance band. Furthermore, we refrain from imposing
any restrictions on the minimum required duration for LVEs.
Here, we use Albania as an example to illustrate UVEs and LVEs. Albania adopted inflation targeting policy in January 2009, with
the inflation target band set at 2 % – 4 %. Following the adoption of Albania’s IT policy, the first quarter of 2009 witnessed an inflation
rate of 7.05 %, while the second quarter experienced a marked decrease with an inflation rate of − 0.667 %. This marks the onset of the
first UVE in Albania, characterized by a duration of one quarter. In total, fifteen UVEs were identified in Albania from 2009 to 2022,
with a minimum duration of one quarter and a maximum duration of two quarters, as presented in Table 14. The mean duration for

12
Here, we extract two types of inflation rates from our observations to investigate the asymmetric behavior of inflation rates as follows: ob­
servations below the lower bound and observations above the upper bound. By concentrating on inflation rates that deviate from the target range,
we obtain a limited number of observations in each group and thus we do not force a certain period for UVEs and LVEs.

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Table 14
UVEs and LVEs for Albania.
Type No. of Obs. Mean Min Max

UVEs 15 1.333 1 2
LVEs 13 2.308 2 3

Fig. 3. Kaplan-Meier Estimates for HIEs: UVEs vs LVEs.

these UVEs is approximately 1.33 quarters. In the second quarter, the inflation rate in Albania dropped below 2 % and persisted for two
quarters, leading to the generation of the first LVE based on our established standard, with a duration of two quarters. Table 14 reveals
the presence of thirteen LVEs occurring from 2009 to 2022 in Albania. These LVEs exhibit a minimum duration of two quarters and a
maximum duration of three quarters, with an average duration of around 2.308 quarters.

4.4.2. Asymmetric behavior of inflation rates between UVEs and LVEs

The purpose of this section is to investigate whether the two types of violations- UVEs and LVEs -are indeed treated differently, as
suggested by certain previous studies (Akdogan, 2015; Martin & Milas, 2004; Ruge-Murcia, 2003).
In order to generate UVEs and LVEs, it is essential to identify the annual inflation target rate or target range for each country since
the adoption of their respective IT policies. After thorough exploration of all available data sources, we have identified only 25
countries suitable for analysis in this section. In general, when inflation rates are low rather than being high, central banks tend to shift
their focus towards other economic aspects, such as output stability, unemployment, and related factors, as opposed to solely
concentrating on inflation rates. Consequently, we could anticipate that central banks are likely to respond more promptly to inflation
rates exceeding the upper bound than to those falling below the lower bound. In other words, we anticipate that the duration of UVEs
would be shorter than that of LVEs due to the asymmetric response of central banks for each of them.
To explore the response of central banks under IT policy towards UVEs (dum = 1) and LVEs (dum = 0), we conduct both Kaplan
Meier Analysis and Cox-Proportional Analysis for all 25 inflation targeters. This analysis is based on quarterly data. The sample periods
start on different dates since each IT targeter adopted the IT policy at a different time; however, the end date is in Q4, 2022.
Fig. 3 displays the speeds at which inflation targeters exit from LVEs (Dum = 0) and UVEs (Dum = 1). The blue line (solid line)
corresponds to the group of LVEs, while the red line (dash line) represents the group of UVEs. It is notable that the red line (dash line) is
positioned above the blue line (solid line), indicating a higher probability of remaining in UVEs compared to LVEs. This suggests that
inflation targeters tend to exit UVEs at a slower pace than they do for exiting LVEs.
As shown in Table 15, the median and mean of durations for LVEs among all 25 IT targeters are 1 quarter and 1.74 quarters,
respectively. Conversely, the median and mean of durations for UVEs are 2 quarters and 2.146 quarters, respectively. The duration of
LVEs appears to be relatively shorter than that of UVEs. In order to see whether the median and mean of durations for the LVEs are
statistically significantly shorter than the median and mean duration for UVEs, we perform both the Log-Rank test and the Wilcoxon
test.
As presented in Table 16, the disparity between the events observed and the events expected is substantial, leading to a highly
significant p-value of 0.00 in χ 2 − test with one degree of freedom. Consequently, we reject the null hypothesis, indicating that the two
survival functions for UVEs and LVEs are not equal. In other words, the significant disparity in the Kaplan-Meier (KM) survival function
indicates that the median and mean of durations between UVEs and LVEs, as shown in Table 15, are indeed different. Specifically, the
median and mean durations for LVEs are relatively shorter compared to those for UVEs.
Furthermore, we have conducted the Cox Proportional Hazard Model Analysis for UVEs and LVEs in order to examine the factors
influencing the difference in the speed of exiting the LVEs and the UVEs, with LVEs as the base group. As shown in Table 17, we have
incorporated income level, world inflation rate, exchange rate volatility, real GDP growth rates and oil price as control variables, as

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Table 15
Kaplan-Meier Model analysis results.
LVEs UVEs Total Sample Periods

Median 1 2 1
(1, 1) (1, 2) (1, 2)

Mean 1.740 2.146 1.944

(1.611, 1.868) (1.961, 2.330) (1.830, 2.057)

No. Obs 407 412 819

Table 16
Significance test for equality of Kaplan-Meier Survival Function.
IT Policy Observed Events Expected Events

LVEs 407 373.13

UVEs 412 445.87
Total 819 819

Log-Rank Test Wilcoxon Test

x2 (1) = 12.38 x2 (1) = 10.68
Pr > x2 = 0.000 Pr > x2 = 0.001

Table 17
Baseline Cox Proportional Hazards Models (Quarterly data).
(a)Coefficient (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

Dum − 0.169** − 0.159** − 0.165** − 0.178** − 0.193** − 0.145** − 0.152** − 0.140* − 0.133 − 0.136
High Income 0.149** 0.144* 0.124 0.130
World Inflation − 0.027 − 0.044* − 0.036 − 0.040*
Exchange rate Volatility − 0.003 − 0.002 − 0.002 − 0.002
Real GDP Growth Rate − 0.002 − 0.002 − 0.0015 − 0.001
WTI Oil Price − 0.003** − 0.0019
Brent Oil Price − 0.002* − 0.001
Exits 819 819 792 799 657 819 819 652 652 652
N 1592 1592 1551 1572 1302 1592 1592 1286 1286 1286

(b)Hazard Ratios (1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

exp(Dum) 0.844** 0.853** 0.848** 0.837** 0.824** 0.864** 0.859** 0.870* 0.875 0.873
exp(High Income) 1.160** 1.154* 1.132 1.139
exp(World Inflation) 0.973 0.957* 0.965 0.961*
exp(Exchange rate Volatility) 0.997 0.998 0.998 0.998
exp(Real GDP Growth Rate) 0.998 0.998 0.998 0.998
exp(WTI Oil Price) 0.997** 0.998
exp(Brent Oil Price) 0.997* 0.999
Exits 819 819 792 799 657 819 819 652 652 652
N 1592 1592 1551 1572 1302 1592 1592 1286 1286 1286

Note: ***p < 0.01, **p < 0.05, *p < 0.10.

these factors are expected to have an impact on inflation rates. As presented in Table 17 column (2), the income level (High Income)
has a statistically significant impact on the speed of exiting either UVEs or LVEs. To be more specific, developed countries have a
positive effect on the speed of exiting either UVEs or LVEs compared to less developed countries. This implies that IT targeters in
developed countries, particularly those with higher income levels, tend to achieve a faster return of inflation rates to the target range.
This may be due to the fact that the central banks in developed nations typically have greater credibility and independence, which
allows them to anchor inflation expectations more effectively.
As shown in Table 17, columns (6) and (7), both WTI and Brent oil price have hazard ratios of 0.997, indicating a negative correlation
with the speed of exiting either UVEs or LVEs suggesting that as oil prices rise, the duration of deviated inflation rates from a target band,
whether in UVEs or LVEs, tends to be longer. While the two oil prices may positively influence the duration of UVEs, they might have a
negative impact on the duration of LVEs. From the findings, it is challenging to discern the distinct effects of WTI and Brent oil prices on the
duration of UVEs and LVEs individually. However, there is an inclination to anticipate that the impact of the two oil prices on the duration
of UVEs might be more pronounced compared to that on LVEs. The relationship between oil prices and inflation rates is undeniably
complex, influenced by various factors such as demand, supply, and central bank responses. The specific regression results underscore the
need for further research to achieve a comprehensive understanding of the dynamics involved in this intricate relationship.
The coefficients for the dummy variable (Dum = 1 if they are UVEs, Dum = 0 if they are LVEs) in columns (1) to (7) of Table 17 reveal
that the probability of exiting UVEs is statistically and significantly slower than that of exiting LVEs at the 5 percent significance level. By
incrementally introducing the control variables one at a time, the coefficients for the dummy variable exhibit slight changes, but these
differences are not substantial. A shorter average duration of LVEs compared to UVEs does not necessarily imply that central banks act
more swiftly to return inflation rates to the target level when they are below the lower bound rather than when they are above the upper

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bound. Several reasons could lead to this discrepancy. For instance, central banks may have specific policies, such as forward guidance, or
different tools to address inflation deviations in either direction. Additionally, the response to inflation may be influenced by external
factors like economic conditions, fiscal policies, and inflation expectations. Therefore, the relationship between the duration of LVEs or
UVEs and central bank actions is influenced by a complex interplay of factors, and it does not provide a straightforward conclusion about
policy effectiveness. An alternative interpretation of the analyzed results suggests that, in the aftermath of the global financial crisis of
2007-08, numerous countries, including Great Britain, have witnessed a convergence of interest rates towards the Zero Lower Bound (ZLB).
Concurrently, inflation rates in these nations have persistently remained at relatively lower levels in the subsequent years. This phe­
nomenon underscores the imperative for central banks in such countries to place heightened emphasis on addressing the breach of the
lower bound in inflation. The deleterious effects of deflation on the economy amplify the urgency for central banks to respond promptly
and effectively to mitigate the adverse consequences associated with violating the lower bound.

5. Conclusion

Since central bank of New Zealand adopted inflation targeting in 1990, approximately 90 countries, including both developed and
less developed nations, have embraced this policy approach as of January 2023. Unlike the two previous monetary policies-exchange
rate targeting and monetary targeting, central banks have high accountability and high transparency under IT policy. Over the years,
researchers have focused on assessing the impact of IT policy on inflation performance, examining whether it results in reduced
average level of inflation rates, lower inflation rate volatility, and decreased inflation rate persistence.
Our study makes several notable contributions to the literature on inflation targeting. First, we introduce a novel approach to assess
inflation performance by measuring the duration of high inflation episodes (HIEs), defined as instances when inflation rates reach or
exceed 4.5 percent for at least three consecutive quarters. We investigate whether the average duration of HIEs is shorter in the post-
inflation targeting (IT) policy period compared to the pre- IT policy era, examining the potential positive effects of IT policy on infla­
tion performance. Furthermore, we explore alternative threshold values of 6.5 % and 10 % for HIEs, which yield results consistent with our
benchmark regression. Second, we employ Survival Analysis, a methodology commonly used for studying time to event data, particularly
suitable for analyzing episodic events like HIEs. Third, we extend our dataset to the most recent period, covering 1980:Q1 to 2022:Q4,
enabling an assessment of the effects of IT policy on price stability with the latest data. Lastly, we investigate whether there is asymmetric
behavior in inflation rates concerning deviations above the upper bound or below the lower bound of a target range or tolerance band. This
exploration aims to shed light on whether central banks respond differently to inflation rate deviations outside these bounds.
We observe that the duration of high inflation episodes (HIEs) is shorter in the post-inflation targeting (IT) policy era compared to the pre-
IT policy period. We find that there is no discernible distinction between developed and less developed inflation targeters in this regard.
Moreover, our analysis reveals that the duration of HIEs remains unaffected by real GDP growth rate and world inflation rate, while exchange
rate volatility exerts a positive influence on the duration of HIEs. Additionally, we identify evidence of asymmetric behavior in inflation rates.
Specifically, the speed of exiting Lower Violation Episodes (LVEs) is relatively swifter than that of exiting Upper Violation Episodes (UVEs).
Our findings imply that inflation targeting policies have a positive impact on promoting price stability. In essence, most inflation
targeters actively work to maintain inflation rates within the specified target range or tolerance band, regardless of whether actual
inflation rates deviate above the upper bound or below the lower bound of the target range.
These findings are particularly significant in the current global economic landscape, where the COVID-19 pandemic has led to
inflationary pressures in numerous countries. Our findings suggest that inflation targeting policies play a pivotal role in mitigating the
impact of such inflationary shocks, contributing to price stability on a global scale.
However, it’s worth noting that the relationship between oil prices and correspondingly how central banks respond to deviations
from target ranges remains a complex and unresolved issue. Further research is required to untangle the intricacies of this relationship,
shedding more light on the interplay between oil price fluctuations and central bank policies in the context of inflation targeting.
Moreover, in our paper, we did not investigate the impact of IT policy on financial stability, a crucial aspect highlighted by Reichlin
and Baldwin (2013) in the aftermath of the global financial crisis of 2007-08. They argue that price stability could not be treated in
isolation from financial stability, emphasizing that financial stability is a precondition for achieving price stability. Accordingly,
exploring the relation between IT policy, financial stability and price stability could be a focal point for our future research.

Author statement

We wish to emphasize that this manuscript has not been previously published and is not concurrently under review in a similar or
substantially equivalent form by any other peer-reviewed journal. The authors declare that there are no conflicts of interest related to
this publication, and no substantial financial support was received for this research that could have influenced its outcomes. The data
utilized in this study is available upon request from the corresponding author, Eun-Son Lim.

Data availability

Data will be made available on request.

Appendix

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M. Guo and E.-S. Lim International Review of Economics and Finance 91 (2024) 1015–1032

Table A
Data Source
Country IT Effective Dates Source

Albania 2009. 1 https://www.bankofalbania.org/Monetary_Policy

Armenia, Rep. 2006.1 www.cba.am/en/SitePages/mppubl.aspx
Australia 1993.6 https://www.rba.gov.au/education/resources/explainers/
australias-inflation-target.html
Brazil 1999.6 https://www.bcb.gov.br/en/monetarypolicy/Inflationtargeting
Canada 1991.2 https://www.bankofcanada.ca
Chile 1999.9 https://core.ac.uk/download/pdf/6642583.pdf;
https://www.ceicdata.com/en/chile/consumer-price-index-inflation-target/
central-bank-of-chile-inflation-target
Colombia 1999.1 https://www.banrep.gov.co/en/monetary-policy
Czech Rep. 1997.12 https://www.cnb.cz/en/monetary-policy
Georgia 2009.1 source: 1. https://www.nbg.gov.ge/uploads/publications/annualreport/2009/
annual_report_eng_web.pdf
2. https://www.nbg.gov.ge/uploads/publications/annualreport/2010/
annual.eng.veb_versia.saboloo2010.pdf
3.https://www.nbg.gov.ge/uploads/publications/annualreport/2013/
25.09.14annualeng.pdf
Hungary 2001.6 https://www.mnb.hu/en/monetary-policy/monetary-policy-framework/
inflation-targeting
Indonesia 2005.7 https://www.bi.go.id/en/publikasi/lelang/operasi-moneter/Default.aspx
South Korea 1998.4 https://www.bok.or.kr/eng/main/contents.do?menuNo=400015
-:~:text = Inflation %20targeting %20is
%20the %20monetary %20policy %20regime %20adopted,of %20setting %20intermediate
%20targets %20such %20as %20money %20supply.
Mexico 2001.1 The Conquest of Mexican Inflation - 2011 Annual Report, Gobalization and Monetary Policy Institute - Dallas Fed
Moldova, Rep. 2010.1 The main features of the inflation targeting regime | National Bank of Moldova (bnm.md)
New Zealand 1989.12 https://www.rbnz.govt.nz/monetary-policy/history-of-policy-
targets-agreements
Norway 2001.3 https://www.norges-bank.no/contentassets/6f148f296f154705a0d845839e638351/
monetary-policy-report-1-21.pdf?v=03/18/2021154937&
ft=.pdf
Peru 2002.1 https://www.bcrp.gob.pe/en/frequently-asked-questions.html
Philippines 2002.1 https://www.bsp.gov.ph/SitePages/Default.aspx
Poland, Rep. 1998.1 https://www.nbp.pl/homen.aspx?f=/en/
publikacje/raport_inflacja/raport_inflacja.html
Romania 2005.8 https://www.bnr.ro/Inflation-Targets-3241.aspx
Serbia, Rep. 2006.1 vol4no2-4.pdf (cbcg.me)
South Africa 2000.2 https://www.resbank.co.za/en/home/what-we-do/monetary-
policy/inflation-targeting-framework
-:~:text = South %20Africa %20uses %20an
%20inflation %20target %20of %203 %E2 %80 %936 %25 %2C,the %204.5
%25 %20midpoint %20of %20the %203 %E2 %80 %936 %25 %20target %20range.
Thailand 2000.5 https://www.bot.or.th/English/MonetaryPolicy/MonetPolicyKnowledge/Pages/
Target.aspx-&&/wEXAQVFY3RsMDBfY3RsNzNfZ183MzIzYzI1Y19mYj
E2XzRlNDJfOGVmNV8xY2EyNTZkODcyNzJfY3RsMDBfSGlkZGVuRmllbGQyBXljdGw3M19nXzczMjNjMC
UzYmN0bDczX2dfNzMyM2MxJTNiJTVlK0ZpbHRlcklEJTVlSW5mbGF0aW9uK3RhcmdldCtmcm9tK01heSs
yMDAwK3RvK0RlY2VtYmVyKzIwMDglM2IlM2IlNWUrRmlsdGVyU2VsZWN0JTVlWuQD7dVLXLKUG0IBNFq
RhlySHCt5mMVpLTtwe3FjzD0=
Turkey 2006.1 https://www.tcmb.gov.tr/wps/wcm/connect/EN/TCMB+EN/
Main+Menu/Core+Functions/Monetary+Policy/PRICE+STABILITY+
AND+INFLATION/Inflation+Targets
United Kingdom 1992.1 https://www.bankofengland.co.uk/

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