Adoption Of Inflation Targeting Research Articles

How are green stocks and monetary policy related?

We propose and test the hypothesis that green stocks and monetary policies are interdependent. Using time-series data for two large economies (India and Indonesia), that have adopted inflation targeting regimes, we develop a structural vector autoregressive model of monetary policy and green stocks that combines with output. We find that green stock prices fall (rise) in response to inflation with a lagged effect and policy rate shocks for India (Indonesia). Currency depreciation, on the other hand, increases green stock prices for India but has a muted effect for Indonesia. We also discover that, for India, monetary policies hardly respond to green stock price shocks while, for Indonesia, green stock prices do influence the evolution of monetary price variables. Our main contribution is that we decipher the effects of green stocks from aggregate market shocks and show each of these market price shocks is related to the monetary aggregates.

Exchange Rate Pass-Through to Domestic Prices: Is Inflation Targeting an Optimal Policy Choice for Pakistan?

This study investigates the effect of exchange rate dynamics and its impact on consumer prices in Pakistan. Using monthly data for the period 2004- 2022, the Recursive Vector Autoregressive (VAR) technique has been employed for the empirical analysis. The recursive VAR estimation technique yields impulse response functions that demonstrate the incompleteness of exchange rate pass-through (ERPT). The results of the VAR reflect that the consumer prices bring most of the error variance in itself for the period under consideration. The exchange rate has been established to be the second most significant source of variations in consumer prices. The empirical results suggest that the lower ERPT reduces the risk of exchange rate volatility. Hence the monetary authorities may take steps to adopt inflation targeting in Pakistan.

The rise of inflation targeting

AbstractThis paper discusses the interactions between politics and economic ideas leading to the adoption of inflation targeting in the United States. In the gold standard era, farmers' vulnerability to falling prices made price‐level stabilization a salient political and social concern. Economists of the progressive era honed in on price‐level stabilization as a key to promoting prosperity and social justice. Irving Fisher, in alliance with farm interests, helped members of Congress introduce price‐level stabilization bills that, while unsuccessful, introduced the possibility that a price‐level stabilization mandate might be a viable alternative to a gold standard. In the postwar years, the Great Inflation and Volcker disinflation set the stage for the rise of inflation targeting by highlighting the benefits of credibility, transparency, and expectations management. Tensions inherent in the implementation of inflation targeting—including its position in the “rules versus discretion” debate—have become more pronounced since the post‐COVID run‐up in inflation.

The choice of monetary regimes in emerging market economies: Inflation targeting versus its alternatives

This paper examines the macroeconomic, financial, and institutional factors that affect the adoption of inflation targeting vis-a-vis alternative monetary policy strategies for 44 emerging market economies during 1990–2017. We employ a multinomial logistic regression with inflation targeting and exchange rate pegs as treatment groups, and intermediary monetary strategies as the baseline group. The main findings from our study are as follows: higher average inflation is associated with lower probability of adopting inflation targeting; while both output growth and its volatility make the adoption of inflation targeting less likely. Concerning the effects of the control variables, financial sector development, central bank independence, greater exposure to capital flows, and the level of economic development are all associated with higher likelihood of adopting inflation targeting, whereas higher public debt, trade openness, and money growth have the opposite effect. Macroeconomic conditions seem to have different impact on the choice of inflation targeting and exchange rate pegs, whereas similar institutional conditions are conducive to the implementation of both regimes. Finally, the effects of macroeconomic and institutional conditions do not depend on the type of inflation targeting.

Inflation at risk in advanced and emerging market economies

Using quantile regression techniques, we study the drivers of inflation risks in a large panel of advanced and emerging market economies (EMEs). We document several facts regarding the inflation forecast distribution and highlight some key differences between these two groups of countries. First, the exchange rate has a quantitatively important and non-linear impact on the inflation outlook in EMEs: a depreciation is associated with larger increases in the upper quantiles than in the lower quantiles, increasing the right skewness of the distribution. By contrast, there is no evidence of such non-linearities for advanced economies. Second, tighter financial conditions in EMEs carry both downside and upside risks to inflation, while having a muted impact on the modal or mean outcome. This is in contrast to advanced economies, where only downside risks prove sensitive. Third, the zero lower bound on policy rates translates into substantial downside risks to inflation. Finally, the adoption of inflation targeting is associated not only with lower mean inflation but also with a less right-skewed distribution. Our findings underscore the importance of including non-linearities in structural models of inflation dynamics.

The impact of monetary policy on income inequality: Does inflation targeting matter?

Does inflation targeting affect the nexus between monetary policy and income inequality? We address this question by estimating country-specific structural vector autoregression models across the G7 economies. We find that contractionary monetary policy shocks increase income inequality when using a long period of data from 1974–2019. However, controlling for the adoption of inflation targeting reduces the size of this effect in Japan and the UK, and it disappears altogether in Canada and the US. This suggests that country-specific inflation targeting may mitigate the inequality-inducing effects of unanticipated monetary contractions. In contrast, mixed evidence is found for Eurozone countries: France, Germany, and Italy.

Monetary Policy and Inflation Targeting: The Effectiveness of Central Bank Interventions

Central banks throughout the world have adopted inflation targeting as their main policy goal in the last several decades, drastically altering monetary policy—a pillar of economic management. the complex interplay between monetary policy, central bank interventions and measures for controlling inflation, and the success or failure of inflation targeting as a whole. This research aims to shed light on the extent to which central bank operations impact inflation results and the larger economic environment by conducting a thorough review of empirical evidence, case studies, and theoretical frameworks.

INFLATION AND ECONOMIC GROWTH TRENDS: GLOBAL AND SOUTH AFRICAN PERSPECTIVES

This paper explores the global inflation and economic growth trends, with a special focus on South Africa, from the 1970s – the period marked by the crumbling of the Bretton Woods system and the ensuing stagflation – to 2022. Our exploration reveals that global inflation is driven mainly by advanced economies, and there are signs of a negative correlation between the levels of income and inflation rates. We observed a structural break in global inflation in 1995 when inflation substantially decreased and became more stable than before. Our analysis links this structural break and stability in inflation to the emergence of strict monetary policy regimes like inflation targeting. Emerging and developing economies experienced a substantial decrease in inflation after they adopted inflation-targeting policies, as compared to advanced economies. In contrast, AEs benefitted from a significant rise in their economic growth. For South Africa, the trends in inflation and economic growth displayed a different picture. Although negligibly, South Africa’s inflation rose three years after adopting inflation targeting. During the same period, the South Africa experienced rising economic growth. To better understand the relationship between inflation and economic growth, we suggest the use of extensive data and models to investigate the structural breaks experienced.

Inflation targeting and fiscal policy volatility: Evidence from developing countries

This paper studies the effect of inflation targeting (IT) on fiscal policy volatility. Using data for 83 developing countries over 1985-2020, estimations based on impact analysis methods reveal that IT adoption reduces fiscal policy volatility. This result is robust when using a wide set of alternative specifications related to additional control variables, different samples, alternative measures of the main variables, or alternative estimation methods. Consequently, contributing to the ongoing literature on fiscal policy volatility, our results suggest that reforms of the monetary policy management in the form of IT adoption may provide a useful policy for fighting fiscal discretion towards a reduction of fiscal policy volatility.

Regional house price convergence: implications of monetary policy

ABSTRACT Motivated by the structural change since the adoption of inflation targeting in October 1992, this research investigates regional house price convergence in the UK over the period 1973:Q4–2020:Q4. By using subsample comparisons, results show that all regions in the inflation-targeting regime converges to one club until the Global Financial Crisis. The finding suggests that the successful inflation-targeting policy can promote integration among regions.

Inflation Targeting, Exchange Rate Distortion and Output Stabilisation A Case of Zimbabwe Disinflation

Inflation targeting (IT) is practised in many countries and the real effects of strict inflation targeting were investigated on several occasions and less on other variants of IT. The study investigates the effects of inflation targeting lite on output. In particular, the compatibility of inflation targeting lite with managed exchange rate regime on output stabilization. The inflation targeting regime, the operating environment and exchange rate regimes were reviewed for Zimbabwe. An ARDL model was adopted as the empirical strategy to investigate the compatibility problem and the real effects of IT lite. Modelling output as output gap, inflation targeting lite and the exchange rate regimes were found to be inconsistent with output stabilization. IT lite and exchange rate premium increased the output gap, however the interaction between IT lite and exchange rate premium had negative effects on output. These results hold for both the short run and long run. However, considering the official rate and parallel rate separately, parallel rate has a negative effect but its interaction with IT has positive effects. The study recommends that developing countries should consider the exchange rate systems before the adoption of IT as a monetary policy framework. A floating exchange rate seemed to be compatible with IT lite.

Improving Macroeconomic Management: Experiences and Lessons

The relationship between growth and macroeconomic stability is a wellestablished phenomenon. Long-term growth requires a higher level of investment and a stable economic environment contributes in promoting saving and investment. Good macroeconomic policies help attract foreign saving. Sound fiscal and monetary policies create a conducive climate for private investment and economic growth. So, the policymakers need to redress the problems of domestic and external financial imbalances by designing and implementing an appropriate mix of policies for achieving higher growth, lower price uncertainty, reduced external imbalances, and other macroeconomic vulnerabilities. So, the important issues facing the policymakers are designing sound exchange rate arrangement, making current account sustainable, and promoting financial and macroeconomic stability. In order to promote sound macroeconomic environment for attaining sustained economic growth, there is a need to pursue more flexible exchange rate regime and make progress toward adopting inflation targeting in addition to improving the financial sector soundness, strength and stability.

Does monetary policy really matter for environmental protection? The case of inflation targeting

Empirical work examining the role of monetary policy on environmental issues are rather scarce. This study examines how inflation targeting (IT) relates to environmental pollution in samples of 22 Developed Market Economies (DMEs) and 25 Emerging Market Economies (EMEs) over the period 1980–2017. Using a parametric approach (two-step system-generalized method of moments), we find that IT significantly reduces emissions of polluting gases, specifically carbon dioxide (CO2), nitrous oxide (N2O), methane (CH4), and total greenhouse gases (GHG) in DMEs and EMEs. In order to take into account, the existence of a potential self-selection bias in the adoption of IT, we subsequently resorted to a non-parametric approach, namely propensity score matching. The results confirm those obtained in the parametric approach. Then, using structural equation modeling, we find that IT reduces environmental pollution mainly through the financial instability channel. In addition, based on the insights from the recent literature, we test the moderating role of financial development and financial stability. The results indicate that these variables reduce the “green effect” of IT. Ultimately, our findings provide an interesting empirical basis for policymakers to help them build a sound macroeconomic and financial framework that promotes more environmentally friendly financial behaviors.

Anticipation of central banks' adoption of inflation targeting and its effect on inflation

We construct an empirical test of whether the anticipation of adoption of inflation targeting affects the inflation rate. We observe that most of the central banks adopt the regime after first achieving significant disinflation. With pre-inflation-targeting-disinflation, initial targets are met with success and the new regime gains credibility. Working with data for 114 emerging market, advanced and low-income economies, we identify the effect using forward-looking dynamic panel data models in a difference-in-difference framework. We find that inflation targeting is successful in locking-in already low inflation rather than reducing high inflation. The analysis has important implications for central banks looking forward to adoption of inflation targeting.

Inflation targeting and the composition of public expenditure: Evidence from developing countries

An important literature shows that inflation targeting (IT) adoption improves fiscal discipline. Our impact assessment analysis performed in a large sample of 89 developing countries over three decades shows that this favorable impact covers a composition effect: IT adoption is found to reduce more current expenditure compared with public investment in IT countries relative to non-IT countries. This finding is robust to various alternative specification, related to the structure of the sample, the measurement of the IT regime, or the estimation method. Consequently, aside from its acknowledged benefits for monetary policy goals, IT appears as an efficient tool to strengthen fiscal policy in developing countries towards lower and more productive public expenditure.

Challenges to Disinflation: The Brazilian Experience

ABSTRACT: We review two previous bouts of high inflation and disinflation since Brazil adopted inflation targeting. In both episodes, fiscal sustainability concerns were present and inflation expectations became unanchored despite substantial monetary policy tightening. Disinflation and the reanchoring of expectations took time and proved costly, as both episodes entailed a recession. They required tight monetary policy combined with critical shifts toward structural economic reforms and sound fiscal policy. The ongoing episode features the same fiscal concerns and unanchored inflation expectations. This suggests the path ahead for disinflation will be challenging, unless policies change direction. We also speculate whether the Brazilian experience can provide insights for other countries.

Adopting Inflation Targeting in Emerging Markets: Exploring the Factors behind the Decision

Adopting Inflation Targeting in Emerging Markets: Exploring the Factors behind the Decision

Macro Effects of Formal Adoption of Inflation Targeting

Macro Effects of Formal Adoption of Inflation Targeting

THE ROLE OF INFLATION TARGETING ON EXCHANGE RATE VOLATILITY: AN EVIDENCE FROM PROPENSITY SCORE MATCHING APPROACH

This study examines the treatment effects of inflation targeting on exchange rate volatility across a large panel of 91 (36 inflation targeting) countries over the 1985-2019 period on annual basis. We apply propensity score matching methods to developed, developing, and high-income inflation targeting countries and non-inflation targeting countries. Our results reveal that, on average, adopting the inflation targeting policy exerts lower exchange rate volatility in all sample and developing economies. However, subgroups results demonstrate that inflation targeting regimes may lead to higher exchange rate volatility in developed and high-income economies. The outcome from different degrees of flexibility of exchange rates subgroups points out that the inflation targeting regime has significant and lower exchange rate volatility under free-floating regimes however this policy stance has no discernible effect on floating regimes. Additionally, adopted inflation targeting countries are affected by less damage on exchange rate volatility than those adopting exchange rate targeting regimes.

Monetary policy transmission, productive activity, and inflation in Brazil: Does uncertainty matter?

This research paper aimed to assess the impact of uncertainties on the outcomes of monetary policy in Brazil after the adoption of inflation targeting. To this end, we adopted the methodology of vector autoregressions with an endogenous threshold (TVAR) and four distinct indicators to characterize regimes of high vs. low macroeconomic uncertainty. The analyzed sample varied from 2003 to 2021, with monthly data. Our results showed that uncertainty tended to increase during recessions in the country. Furthermore, in periods of higher instability, policy interest rate shocks exerted a lesser effect on aggregate production. However, the most significant influence of uncertainty occurred regarding inflation control, which was severely reduced when compared to more tranquil periods. Therefore, we concluded that uncertainty can harm monetary policy transmission in Brazil, especially for the adjustment of prices.