The Prospect of Inflation Targeting in Kazakhstan

Abstract

Over the last two decades, there was a significant increase in the number of countries, which started to pursue an Inflation Targeting monetary policy framework. Since the collapse of the Soviet Union, each of fifteen newly created independent countries started to develop and run their own autonomous monetary policies. Having inherited not well-suited market monetary institutions, the collapse of the system led to the most severe economic downturn in those new states. Kazakhstan has announced about implementation of Inflation Targeting policy in August 2015. At the same time, number of researches show that Inflation Targeting might not work well for developing countries as it is for developed ones due to certain fundamental differences and preconditions that must be met before implementation phase. Thus, discussing the case of Kazakhstan as a classical emerging market economy example, examining its ability to respond on various external shocks and identifying main transmission channels would importantly contribute to the knowledge in this area. Identification assumptions for contemporaneous inflation behavior generates practical monetary policy shocks, which also take into account various features of the small open economy. The orthogonal policy shocks generated with the help of our SVAR model suggested us various monetary transitory effects on output and the price level. Accordingly, based on the interpretation of impulse response functions, positive interest rate shock has certain disinflationary impact, opposing existing opinion on weakness of interest rate manipulation to keep inflation within the given band. At the same time, positive exchange rate shock leads to more sensitive increase in inflation rates. In addition, inflation inertia does explain a substantial increase in future inflation rates. This is in compliance with traditional EMEs literature on monetary policy transmission channels mechanisms.