Transmission Mechanisms of Inflation Targeting: Analysis of Transmission Processes

Abstract

The purpose of the study is an analytical review of the main theories of inflation targeting and transmission mechanism. Inflation targeting is a monetary policy strategy in which the central bank sets a specific inflation rate as the main target and makes decisions on the interest rate and other measures to achieve this goal. The insufficient capitalization of second-tier banks and the low quality of existing borrowers create difficulties in linking the structural liquidity surplus and require its sterilization by using monetary policy instruments with longer terms. As the economy recovers, the impact of the transmission mechanism on inflation will deepen. Improving the channels of the transmission mechanism by gradually eliminating constraining factors will increase the effectiveness of transferring monetary policy decisions to inflation. The effectiveness of monetary policy instruments largely depends on the effectiveness of transmission channels, through which signals of the influence of the National Bank of the Republic of Kazakhstan (NBK) on internal economic processes, including inflation, are transmitted. The measures taken by the NBK to curb inflation primarily include reducing the depreciation of the tenge by raising the base rate, which ensures the attractiveness of tenge instruments. The base rate of the NBK is the main benchmark for the cost of money and lending to the country's economy. Starting from the government and ending with small and medium-sized businesses, they attract funding based on the base rate of the NBK. This indicates the presence of serious imbalances in the functioning of certain channels of the transmission mechanism of the NBK's monetary policy, along with structural problems of the economy. Impact on inflation expectations. Inflation targeting is aimed at forming and maintaining low and stable inflation expectations among the population and entrepreneurs. Changes in inflation expectations can affect the behavior of consumers and firms, which, in turn, can affect prices and wages.