Decenija potpunog ciljanja inflacije u Srbiji

Inflation targeting (IT) has been popular in emerging economies despite its early adoption in advanced countries. This paper seeks to find out whether the presence of the IT regime for the Asian countries enhance credibility of the central banks. The study makes use of two episode methods in the calculation of sacrifice ratio for the period 1970–2014 for 13 Asian economies. Empirical findings based on annual data suggest that an IT regime indeed enhances credibility of the central banks. The low sacrifice ratio in IT countries is explained by the implementation of IT regime. The IT policy has potential to reduce sacrifice ratios by 3.7–5.7 points. Among other determinants initial inflation is found to be significant in Asian economies. However, the speed of disinflation remains insignificant irrespective of the method used in the analysis. These findings do not support the idea that IT and speed can be used alternatively as credible monetary policy.

Introduction. In 2020, the COVID-19 pandemic quickly spread to almost all countries, causing a downturn in the economy and worsening monetary stability. In terms of the scale of its effects, this stress even exceeded the impact of the global financial crisis. It was quite logical to revise the parameters of monetary policy, including lowering (or keeping low) key policy rates, accepting long-term refinancing operations, and reducing the required reserve ratio. All of these measures were intended to stimulate the economy, and the recent practice deserves an examination of how effective the transmission of monetary policy has been. Problem Statement. The implementation of monetary policy in the context of the pandemic is giving rise to new academic discussions about transmission channels, as well as the combination of the general and the particular in the context of countries. The purpose is to examine the transmission mechanism of monetary transmission to achieve the inflation target and ensure sustainable economic growth of the national economy. Methods. General scientific and specific methods of scientific cognition were used. In particular, the study used system analysis to describe models of the monetary policy transmission mechanism; abstract and logical analysis to summarize and build logical links between individual links in the monetary policy transmission mechanism; and statistical and economic analysis to analyze the impact of monetary transmission on inflation under the inflation targeting regime. Methods. System analysis was used to describe models of the transmission mechanism of monetary policy; abstract-logical – for summarizing and building logical connections between separate links of the transmission mechanism of monetary policy; statistical and economic - to analyze the impact of monetary transmission on inflation within the framework of the inflation targeting (IT) regime. Results. Transmission channels are defined as the chain of transmission of the impact from the key policy rate (discount rate) to the next link in the monetary transmission chain. Because of its properties (systematicity, consistency, and microfoundedness), neo-Keynesian logic is well suited to the main macroeconomic models that belong to the class of structural models (including both classical DSGE and semi-structural models). The model used by the National Bank of Ukraine to describe the transmission and build a medium-term forecast of the domestic economy also belongs to the class of structural models. A structural model in the neo-Keynesian logic combines the three most powerful transmission channels - interest rate, exchange rate, and expectations channels. An impulse in the key policy rate is instantly reflected in the 10-day interbank lending rate, and this rate is therefore the NBU's operational target for monetary policy. From the interbank lending rate, the impact of monetary policy is transmitted further to rates in other segments of the money market. Changes in interest rates affect the consumption and investment decisions of economic agents. From market interest rates and financial asset yields, the monetary policy impulse spreads further to lending activity and balance sheet indicators of companies and banks. Changes in the key policy rate affect prices and the value of assets on companies' balance sheets. From the credit sector, the impulse is smoothly transferred to economic activity and inflation. Aggregate demand, expectations, the exchange rate, and producer costs respond to monetary policy. Monetary policy affects expectations and, consequently, inflation by creating an “anchor” for its expected level in the medium term. Conclusions. Achieving the inflation target through the use of the IT regime is an important condition for achieving macroeconomic stability. The NBU's transition to IT was justified, as evidenced by the proven hypothesis of a sharp decline in inflation and price volatility in the medium term. Prices stabilized through the expectations channel. A timely response to the challenges of the pandemic should be accompanied by an easing of monetary policy aimed at reducing the cost of financial resources and restoring long-term lending to the economy. The experience gained enabled the banking system to withstand the next shock - a full-scale Russian aggression against Ukraine, using proven approaches. Studies have shown that the inflation target of 5% ± 1 p.p., which is optimal from the NBU's point of view, does not affect economic growth. The use of the key policy rate instrument demonstrates a delayed reaction of market participants with a lag of 9-18 months. The regulator focuses on the inflation target and, once it is achieved, on measures to support inflation within the planned target. Resolving the dilemma between the planned inflation rates and maintaining economic growth requires regulatory changes to the laws governing the central bank.

The yield curve and the macroeconomy: Evidence from Turkey

PurposeThe evidence concerning the effects of the inflation targeting (IT) regime as well as greater central bank transparency on monetary policy interest rates is not conclusive, and the following questions remain open. What is the effect of adopting IT on both the level and volatility of monetary policy interest rate? Does central bank transparency affect the level of the monetary policy interest rate and its volatility? Are these effects greater in developing countries? The purpose of this paper is to contribute to the literature by answering these questions. Hence, the paper analyzes the effects of IT and central bank transparency on monetary policy.Design/methodology/approachThe analysis uses a sample of 48 countries (31 developing) comprising the period between 1998 and 2014. Based on panel data methodology, estimates are made for the full sample, and then for the sample of developing countries.FindingsCountries that adopt the IT regime tend to have lower levels of monetary policy interest rates, as well as lower interest rate volatility. The effect of adopting IT on both the level and volatility of the basic interest rate is smaller in developing countries. Besides, countries with more transparent central banks have lower levels of monetary policy interest rates, as well as lower interest rate volatility. In turn, the effect of central bank transparency on both the level and volatility of the basic interest rate is greater in developing countries.Practical implicationsThe study brings important practical implications regarding the influence of both the IT regime and central bank transparency on monetary policy.Originality/valueStudies have sought to analyze whether IT and central bank transparency are effective to control inflation. However, few studies analyze the influence of IT and central bank transparency on interest rates. This study differs from the few existing studies since: the analysis is done not only for the effect of transparency on the level of the monetary policy interest rate, but also on its volatility; the central bank transparency index that is used has never been utilized in this sort of analysis; and the study uses panel data methodology, and compares the results between different samples.

Inflation targeting and exchange market pressure in developing economies: Some international evidence

Does domestic investment respond to inflation targeting? A synthetic control investigation

Inflation targeting (IT) arrangements rose to prominence in the early 1990s, when a couple of advanced countries adopted IT as their formal monetary policy framework. Over the years, IT arrangements have also been implement by a growing number of emerging economies, including Korea, Indonesia, Thailand and the Philippines, all of which adopted IT frameworks soon after the Asian crisis. Although formally following IT regimes, the central banks of these four countries have continued to manage their exchange rates against the dollar. While generally low inflation rates during the period of “great moderation” made inflation targeting a relatively easy job and gave central banks leeway to manage exchange rates without compromising their inflation targets, there have been episodes during which conflicts arose between explicit internal inflation targets and informal external exchange rate targets. Conflict, however, may not only arise between inflation and exchange-rate targeting, but also when taking into account the nexus between monetary policy and financial stability. After the Global Financial Crisis clearly exposed the problems that can arise for financial stability when central banks focus too narrowly on inflation rates, a consensus is currently emerging that central banks ought to include financial stability in their policy reaction functions. Against this backdrop, the chapter discusses the trilemma faced by East Asian central banks in targeting inflation rates while at the same time guarding financial market stability and managing exchange rates. It reviews the experience of East Asian countries with inflation targeting to date and discusses the challenges for incorporating macroprudential regulation into monetary policy frameworks while keeping an eye on the exchange rate.

In January 2002, the Central Bank of Turkey (CBT) moved to an implicit inflation targeting framework, which included core attributes of an inflation targeting (IT) regime including, among other requirements, the announcement of a formal target for inflation. As a result of successful disinflation, prudent fiscal policy and implementation of reforms, Turkey introduced a full-fledged IT regime in 2006, which brought further transparency to the monetary policy framework. We found that during 2002–2006, among other factors, the developments in Turkey's risk premium played a very significant role in the path of policy rates. We arrived at this conclusion by estimating a Taylor rule describing the policy reaction function of the CBT. During this period exchange rate pass-through to inflation declined, and while capital inflows strengthened the real exchange rate, the nominal exchange rate and the financial markets in general were affected by occasional reversal of capital inflows. We offer a short discussion of CBT reaction to sudden stop episodes under the new monetary regime. Particularly, we ask whether the sharp increase in policy rates in response to the mid-2006 episode was a defense of the currency instead of adherence to an open economy IT regime. We also discuss whether softening of the targeted disinflation path may have been a viable option.

In inflation targeting (IT) regimes, the Monetary Authority announces an explicit objective, the target for inflation. However, other objectives that possibly conflict with the inflation goal are present, such as keeping output close to its potential level and the stability of financial markets. This multiplicity of objectives has spurred a debate on whether inflation targeting really provides a transparent framework for monetary policy. This question is addressed in this paper, focusing on the experience of six countries that adopted IT. The empirical investigation is based on a variety of data sets (including real time data and Central Bank's forecasts), as well as on alternative forward-looking reaction functions. The main finding is that, if transparency is interpreted as the short run predictability of policy actions, consistent with the announced inflation goal, then most of the IT regimes here examined are remarkably transparent. However, this is not necessarily true if a more broad intepretation of transparency is required. The data also reveals a certain degree of heterogeneity across countries and time, and therefore recommends caution with respect to general statements regarding the properties of IT regimes.

Inflation Targeting in Colombia, 2002–12 Franz Hamann (bio), Marc Hofstetter (bio), and Miguel Urrutia (bio) Over the last twenty years, nearly thirty countries have adopted inflation-targeting regimes to conduct monetary policy. In addition to the announcement of specific inflation targets, inflation-targeting regimes have been characterized by increased transparency, enhanced communication with the public, and explicit accountability mechanisms. Moreover, their policy strategy is based on setting short-run interest rates rather than on targeting monetary aggregates. In principle, inflation-targeting regimes also increase exchange rate flexibility. The performance of inflation-targeting regimes has been a matter of extensive research. For instance, Ball and Sheridan and Lin and Ye conclude that in industrialized countries, inflation targeting did not make a difference in inflation and output behavior.1 The spirit of these conclusions is echoed in two recent surveys on the performance of inflation targeting.2 Another line of research on inflation targeting in industrialized countries studies its impact on sacrifice ratios—output losses per point of inflation during monetary-driven disinflations. According to proponents, inflation targeting anchors inflation expectations, and it should thus allow for less costly disinflation processes. While Gonçalves and Carvalho find strong evidence supporting this hypothesis in developed countries, Brito shows that the results are not robust to the inclusion of time effects.3 De Roux and Hofstetter conclude that inflation [End Page 1] targeting allows for less costly disinflations even when controlling for time effects, but only if disinflations are slow.4 For fast disinflations, it does not yield less costly disinflations. For developing countries, the evidence is less conclusive. Gonçalves and Salles find that inflation targeting allows for a greater reduction in inflation and lower output volatility, a result confirmed by Lin and Ye.5 Brito and Bystedt, however, suggest that the greater inflation reduction came at the expense of poorer output growth.6 In the surveys, Walsh concludes that evidence on inflation targeting in developing countries is clearly favorable to the regime, while Ball is more skeptical, calling the outcomes inconclusive.7 More recently, de Carvalho Filho shows that during the recent global financial crisis, inflation-targeting nations outperformed non-inflation-targeting nations on several dimensions for both developed and developing economies: their policy response was more aggressive, they allowed the exchange rate to more effectively absorb the shocks, and they recorded a stronger macroeconomic performance (output, industrial production, and unemployment).8 The vast empirical literature comparing performance across different monetary regimes stands in contrast to the relatively scant research on the tools, strategies, goals, and dilemmas faced by inflation-targeting central banks, especially in developing countries. While there is good information on the overall comparative performance of these regimes, little information is available on the political economy dimensions, the increasing variety of instruments and goals of inflation-targeting central banks, and the challenges that lie ahead for them. In this paper, we fill part of this gap by examining the experience of the Central Bank of Colombia (Banco de la República) over the last decade, a period of consolidation and innovation of its inflation-targeting strategy. Colombia is one of five large Latin American economies that have well-established inflation-targeting regimes, along with Brazil, Chile, Mexico, and Peru. All of these countries adopted inflation targeting more than ten years ago, yet their performance, tools, and goals have not been extensively studied. Central banks in the region have used a variety of tools beyond short-run policy interest rates, including liquidity and reserve requirements, credit provisions, capital controls, and interventions in the foreign exchange markets. [End Page 2] We employ several strategies to study these issues. We propose and estimate a small-scale open economy policy model for the Colombian economy. This allows us to pinpoint crucial parameters through which we can study some of the policy trade-offs and policy reactions of the central bank. We also provide narrative and anecdotal evidence for understanding some important episodes, tools, challenges, and trade-offs that marked the first decade of inflation targeting. Several findings are worth noting. Our model’s estimates suggest that the impact of foreign variables on domestic outcomes is small and often insignificant. The pass-through of...

Using official communiqués about fiscal policy, we develop a fiscal sentiment indicator, and we verify the reaction of disagreements in inflation expectations to fiscal sentiment. This analysis is relevant to inflation targeting (IT) countries because transparency and communication can influence expectations. The results suggest that a more optimistic fiscal sentiment reduces disagreements in inflation expectations. Estimates show that, for higher disagreements in inflation expectations at 12‐month maturity, an optimistic fiscal sentiment can reduce the disagreement more sharply. In turn, the fiscal sentiment effect on the disagreement for the 48‐month maturity is stronger the smaller the disagreement is. The results allow us to outline the following policy recommendations. First, an optimistic fiscal environment is important in the task of guiding inflation expectations and reducing inflation uncertainty. Second, fiscal communication is an important tool for the expectations formation process, and therefore it must be carefully managed to help in the task of forward guidance of inflation expectations, being important for the IT regime. Third, both fiscal credibility and monetary policy credibility are important for the expectations formation process, particularly for the reduction of inflation uncertainty, representing aspects that must be preserved in countries that adopt the IT regime.

The deterioration in credibility, destabilization of exchange rate and the rise in exchange rate pass-through in Turkey

This research study is focused on the examination of the influence of the introduction and implementation of the monetary Inflation Targeting (IT) regime: the level of the inflation rate and the Gross Domestic Product (GDP) growth rate, as well as inflation and the GDP volatility. Conditional variance is calculated by fitting an empirical Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model to an annualized quarterly date for the period from 1993Q1 to 2020Q3, all in order to assess volatility. The results of the regression model showed that there was a positive statistical significance between the instability of inflation and the instability of the growth rate of the GDP in the three analyzed countries (namely in Albania, Turkey and the Republic of Serbia). The result of introducing the IT regime when the GDP growth rate volatility is concerned is statistically significant in Serbia and Turkey and led to reduction in the GDP volatility and stabilization. However, the applied regression model indicated that, in the case of Albania and Romania, the introduction of the IT regime did not have a statistically significant impact on the GDP growth rate volatility.

After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Emphasizing the role of transparency and the credibility of monetary policy as a performance criterion that motivate any country wishing to adopt an inflation targeting regime, this study leads to the fact that these two basic principles toward which a inflation targeting regime cannot be achieved without respect for certain pre namely institutional and technical conditions.

ABSTRACTThis article critically analyzes inflation targeting (IT) both theoretically and empirically. IT came into prominence in the 1990s and 1 central bank after another adopted this regime in the 1990s and 2000s. Proponents of IT mainly argued that IT regime was successful on the grounds that it resulted in lower inflation rates and hence better economic performances. However, inflation rates in the world were in a downward trend from the 1980s well into the 2000s, and both IT and non-IT regimes managed to decrease their inflation rates. In addition, focusing too much on price stability through IT paved the way for permanently higher than necessary interest rates and disinflationary “tight” monetary policy periods when inflation rate was above an arbitrarily targeted level. Tight monetary policy can and do affect the real economy negatively and overemphasizing price stability may hurt the economy in terms of lower potential output, decreasing investment and more unequal income distribution. Post Keynesians offer valuable alternatives within the framework of parking-it approach to the existing monetary policy paradigm. Our main conclusion is that central banks should set the policy interest rate as low as possible and keep it there, in line with Keynesian “cheap money” policy.