Impact of Government Intervention on Inflation Control (in English)
Mohammad A. Ashraf And Gabriel Rodriguez
This paper detects the effects of government intervention to control inflation. The long memory fractional parameter was estimated using simulation technique in the presence of additive inliers, which serve as a proxy of government intervention. The data generating process considers the case where there are shock-plans i.e. inliers that are short-lived but important in magnitude. The results imply that the level to which inflation falls after the intervention has no impact on the estimate of the fractional parameter and on the persistence of the inflation process. That means any abrupt intervention would have only temporary effect on lowering the inflation rates and the series remain stationary. The findings affirm the conclusion that the stochastic behavior of inflation rate is unstable. Therefore, any government intervention is merely a temporary measure to control inflation, which implies the need for alternative measures of monetary policy. This paper recommends pursuing the time-consistency economic policy, which provides an explanation in order to combat inflation and to sustain the result for the longer period.
Keywords: additive inliers, fractional parameter, Monte-Carlo simulation, monetary policy, inflation control.
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