Domestic Price Stability Research Articles

ARMA-Based Inflation Forecasting Under the Inflation Targeting Framework in Sri Lanka

Inflation targeting has been introduced as one of the monetary policy framework since the end of the 1990s. Forecasting inflation under the inflation-targeting monetary policy framework is also expected to improve with superior performance by constantly feeding updated information into the forecasting process, considering the domestic and global market conditions and developments. Literature evidence that inflation forecasting under inflation targeting is a challenging task with risk and uncertainty that are not easy to capture even in the latest modeling techniques. Inflation-targeting monetary policy was adopted by the Central Bank of Sri Lanka after the enactment of the Central Bank of Sri Lanka Act with effect from 15.09.2023. This study examines inflation forecasting under the inflation-targeting monetary policy in Sri Lanka implemented with a clear mandate assigned in the agreement for a flexible inflation targeting framework to guide the market and inflation expectations. Automatic ARIMA forecasting techniques are employed to forecast inflation using two series of price indices with different base years from 2016M01 to 2026M12, and 2022M01 to 2026 M12 including 30 months as forecasting length. According to the findings, inflation forecasting is in line with the 5 percent targeted level with a 3 percent margin to fluctuate for both sides subject to the upside and downside risk factors. Accordingly, Inflation forecasting is within the inflation projections indicated under the inflation fan chart. It further suggests that inflation has been gradually stable in SL compared to the recently elevated inflation experience. Therefore, inflation targeting and projections can be used to shape and guide market expectations to facilitate decision-making in forward looking policies toward achieving and maintaining domestic price stability, which is the primary objective of the Central Bank of Sri Lanka.

Exploring The Global Slack Hypothesis On Inflation Dynamics: A Study In ASEAN-5

Inflation is one of the economic problems that often occur in ASEAN-5 countries. External factors affecting inflation such as changes in energy prices and commodity prices (agriculture, metals, and minerals) can affect inflation in ASEAN-5 countries through the influence of global slack. Therefore, this study was conducted to examine the effect of global slack on domestic inflation dynamics in ASEAN-5 countries by considering the effect of energy price index and commodity price index (agriculture, metals, and minerals) on domestic inflation. The data analysis method used is the Panel of Vector Error Correction Model (VECM-Panel) by considering the effect of energy price index and commodity price index (agriculture, metals, and minerals) on domestic inflation in ASEAN-5. The results show that there is an influence of global slack on domestic inflation in ASEAN-5 countries, especially through the energy price index and commodity price index. Energy prices affect inflation in both the short and long run, whereas commodity prices only affect long-term inflation. The implication of the results of this study is the importance of the role of global commodity price stability policy in maintaining domestic price stability in ASEAN-5.

The Origins of the Syrian Conflicts

The Origins of the Syrian Conflicts

Monetary policy transmission with two exchange rates of a single currency: The Chinese experience

In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an onshore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.

Effects of variable EU import levies on corn price volatility

The variable import levy for corn imports in the European Union aims to support European producers by insulating domestic prices from low international prices. Such price-insulating policies have been associated with an increase in global market volatility. Eliminating these distortions has been one of the key issues in international negotiations on agricultural trade liberalization, e.g., the commitment of WTO member states to follow the principle of tariffication as part of the Uruguay Round Agreement on Agriculture. Nevertheless, the Blair House Agreement effectively allowed the EU to maintain a variable import levy regime for grain imports, although the magnitude of this levy is substantially smaller than in the past. Notwithstanding that this policy has been a cornerstone of the EU’s Common Agricultural Policy, empirical evidence on the magnitude of its effects on price volatility is largely missing. This paper employs a multivariate asymmetric volatility model to assess these effects on domestic and foreign corn markets, using Argentina – a large exporter of corn – as an example. In line with the relevant theoretical literature, we find empirical evidence for the 2002–2017 period that the variable import levy reduced corn price volatility in the EU market, while significantly increasing volatility to the same extent in Argentina. In a distorted sense, the import levy of the EU has thus been a success, as its variable application rate has stabilized prices in the EU domestic market. However, our results show that this policy has merely shifted price volatility abroad since it has led to increases in price volatility in Argentina. A less distortionary policy to target the problems of agricultural price volatility should shift its focus away from direct price interventions. For instance, domestic policies that improve farmers’ ability to cope with price-related risks would avoid the negative effects of domestic price stabilization in foreign countries.

Credit frictions, fiscal imbalances, monetary policy autonomy, and monetary policy rules

The current study mathematically derives the monetary policy reaction function (MPRF) by incorporating credit spreads, fiscal imbalances, and monetary policy autonomy. The policy reaction function (PRF) has been derived in the framework of Dynamic Stochastic General Equilibrium (DSGE) model. The model clearly states that capital controls allow the central authorities to focus on the stability of domestic prices instead of worrying about capital outflows. The results of the calibrated model predict that credit spread, fiscal imbalances, and monetary policy autonomy significantly affect the rate of interest. The estimates suggest that most of the variability in output, inflation, and the interest rate occurs due to supply and credit spread shocks.

The Impact of Oil Price Shock on Rice Prices in Asean Area: A Framework

The conditions of the world rice market and the domestic rice market are unstable markets and are heavily influenced by external factors. There are many factors that can affect the price of unhulled rice and rice at the farm level, one of which is the effect of the integration of world and domestic rice markets. Thus the events or shocks that occur on the world market will affect the conditions of the domestic rice market. External factors affecting rice trade include petroleum. Oil as one of the factors influencing changes in the demand and supply of various traded commodities because of its vital role. Oil price fluctuations are often used as a benchmark for the stability of world trade conditions.Research specifically on the impact of rice was carried out by Chintia (2013) which states that oil price shocks cause domestic rice prices to have a fluctuating pattern and have an increasing trend, but domestic rice prices always fluctuate on trend. An attractive characteristic of the domestic rice price is that it is always above the world rice price. This occurs because rice is a commodity that has many interventions by the government in maintaining domestic rice price stability and maintaining the purchasing power of the public as consumers and farmers as producers. In the short term, the domestic rice price is influenced by the domestic rice price itself, the imported rice price, and the world crude oil price. In the long run, the domestic rice price is influenced by world rice prices, imported rice prices, and rice production. This paper will discuss the framework for the impact of oil shocks on rice prices in the ASEAN region. This framework is the basis for the stages in conducting further research Keywords: Impact, Rice, oll price, Rice, ASEAN

Asymmetric Price Transmission in the Indonesian Food Market

A large number of goods and companies operating on different markets and selling varied agricultural and food products are present in the food supply chains. As well, the food supply chain associates producer and consumer through price mechanism. One question of specific is whether price rises and declines in the food supply chain at one stage have asymmetrical impacts. Thus, this study was designed to examine asymmetric price transmission in Indonesian food market between the producer and consumer using Engle-Granger two step approach. The study confirmed that producer prices were co-integrated with consumer prices in the food market. As a consequence, an asymmetric error correction model (AECM) was used to test for asymmetric price transmission between price levels in Indonesian food market. The outcome shows a higher response to producer rises than declines in both long-and-short term customer pricing. Hence, the findings show that the prices in the Indonesian food supply chain are favourable asymmetrical. Finally, the results of the present study indicate that the food prices pass-through varies greatly across product category and across country, and the pass-through to producer prices is greater than that in consumer prices. Therefore, understanding the asymmetric transmission is critical to help design better domestic price stabilization policies, and minimize jeopardize the price shocks for both of consumer and producer.

THE FEATURES OF INFLATION IN RUSSIA

The objective of the report is to determine the features of inflation and the major aspects of anti-inflationary policy. The report considers the factors that lead to inflation and its characteristics. The most effective regime, promoting domestic price stability has been defined and substantiated. The statistical information has been analysed by the inflation rate in Russia in the last decade. The report has determined the relationship between inflation and economic cycles and it outlined the key issues of overcoming inflation in Russia.

Time-Consistent Monetary Policy, Terms of Trade Manipulation and Welfare in Open Economies

A key insight from the open economy literature is that domestic price stability is in general not optimal for countries that exert some market power over their terms of trade. Under commitment, a national benevolent monetary policymaker improves upon the allocation associated with stable domestic prices by manipulating the terms of trade to her own country’s advantage. In this paper, I study optimal monetary policy in a sticky-price small open economy model when the policymaker lacks a commitment device. Without commitment, the benevolent policymaker’s attempt to improve national welfare by manipulating the terms of trade can be self-defeating. By steering international relative prices the discretionary policymaker induces fluctuations in domestic prices, the costs of which she is unable to fully internalize in her decision-making. Society may thus be better off if it appoints an inward-looking policymaker who aims for domestic price stability and resists the temptation to exploit the country’s monopoly power in trade. Accounting for the effective lower bound on nominal interest rates further strengthens the case for the inward-looking policy objective. JEL Classification: E52, F41

Determinants of India’s Exports

The objective of this paper is to examine the key determinants of India’s exports. The estimated equations show that the two variables influencing India’s export demand are the real effective exchange rate and world exports. The time trend variable which was introduced to take care of the stationarity problem and India’s GDP which is a proxy for availability also are statistically significant. Equations were also estimated at a disaggregated level of commodity groups. The article also focuses on measuring the relative contribution of the variables. For this, a new methodology is proposed. World exports which emerges as the dominant variable is however exogenous to Indian policy makers. This leaves nominal exchange rate as the tool available to policy makers. In the market determination of exchange rate, besides current account deficit, capital flows also play an important part. There is need to moderate the impact of large capital inflows on exchange rate through appropriate intervention so long as we continue to have current account deficit. An appreciating currency will erode the competitiveness of exports. Truly speaking, the critical factor is not so much exchange rate as competitiveness. In this context, maintaining domestic price stability and improving the productivity, particularly of the traded goods sector are equally important.

Monetary Policy Transmission with Two Exchange Rates and a Single Currency: The Chinese Experience

In emerging market economies, transmission of monetary policy through the foreign exchange market is complicated by the coexistence of financial restrictions and arbitrages. Using China as an example, we show that the coexistence of exchange rate interventions, capital controls and an on-shore-offshore exchange rate differential makes the long run equilibrium in the currency market nonlinear. Disturbances to this nonlinear long run equilibrium could offset the impact of monetary policy actions on domestic price stability. Omitting such nonlinearity leads to biased inference on the effectiveness of monetary policy.

PENGARUH PENGADAAN BERAS DAN OPERASI PASAR TERHADAP HARGA BERAS DALAM NEGERI

This research aimed to determine: (1) factors that affect domestic price of rice, (2) factors that affect the domestic rice availability, (3) domestic price stability of rice for 20 years (1993-2012), and (4) Influence of Market Operations domestic price stabilization. Descriptive analysis method was applied in this research. Secondary data were collected and analyzed with the sofware Eviews 4.0. Multiple linear regression analysis was applied by following the Ordinary Least Square (OLS) method, instead of statistical inference of mean, coefficient of variation (CV), and simple linear correlation analysis. Results of analyses showed that domestic price of rice is positively influenced by the dummy of Raskin and negatively affected by domestic rice procurement. Domestic rice availability is positively influenced by the harvested area and the disparity of price. Based on statistical inference test and the coefficient of variation, the domestic price of rice for the last 20 years (1993-2012) was not stable. Simple linear correlation analysis showed that market operations of Bulog affect positively toward the stabilization of domestic price of rice.

Capital controls and optimal Chinese monetary policy

China׳s external policies, including capital controls, managed exchange rates, and sterilized interventions, constrain its monetary policy options for maintaining macroeconomic stability following external shocks. We study optimal monetary policy in a dynamic stochastic general equilibrium (DSGE) model that incorporates these “Chinese characteristics”. The model highlights a monetary policy tradeoff between domestic price stability and costly sterilization. The same DSGE framework allows us to evaluate the welfare implications of alternative liberalization policies. Capital account and exchange rate liberalization would have allowed the Chinese central bank to better stabilize the external shocks experienced during the global financial crisis.

How False Beliefs About Exchange Rate Systems Threaten Global Growth and the Existence of the Eurozone

The current belief system that says all will be if domestic price stability can be maintained is fundamentally flawed. If this can be achieved only through monetary, credit and debt expansion, the end result will be an increased risk of systemic crisis. Moreover, false beliefs about how exchange rate systems function, at both the global level and within the Eurozone, imply international spillover effects that increase both the likelihood and the seriousness of such crises. Gross international capital flows pose as many (perhaps more) dangers than do net flows (ie current account imbalances). And false beliefs about exchange rate regimes not only compromise crisis prevention, but they also hinder crisis management and resolution. At the global level, we still lack the instruments to do either effectively should current problems worsen. In the Eurozone, the crisis which began in 2010 has not been well managed and remains fundamentally unresolved.

Perspectives on inflation Targeting Regime in Russia

The paper analyzes monetary policy of the Bank of Russia from 2008 to 2014. It presents the dynamics of macroeconomic indicators testifying to inability of the Bank of Russia to transit to inflation targeting regime. It is shown that the presence of short-term interest rates in the top borders of the percentage corridor does not allow to consider the key rate as a basic tool of monetary policy. The article justifies that stability of domestic prices is impossible with-out exchange rate stability. It is proved that to decrease excessive volatility on national consumer and financial markets it is reasonable to apply a policy of managing financial account, actively using for this purpose direct and indirect control tools for the cross-border flows of the private and public capital.

Limits of Monetary Policy Autonomy and Exchange Rate Flexibility by East Asian Central Banks

Given low interest rates in the large industrial countries and buoyant capital inflows into the emerging markets East Asian central banks have accumulated large stocks of foreign reserves. As the resulting easing of monetary conditions has become a threat to domestic price and financial stability, the East Asian central banks have embarked on substantial sterilization operations to absorb what we call ‘surplus liquidity’ from the domestic banking systems. This has brought the East Asian central banks into debtor positions versus the domestic banking systems. We show based on a central bank loss function that given buoyant capital inflows and exchange rate stabilization the absorption of surplus liquidity leads either to financial repression, or rising inflation or both. Assuming that a debtor central bank moved towards a freely floating exchange rate to gain monetary policy independence, we show that monetary policy independence is undermined by sterilization costs and revaluation losses on foreign reserves.

Potential Trade Distortion Effects of State Trading Enterprises under the Tariff-Rate Quota Scheme

Abstract The paper analyzes the potential trade distortion effects of state trading enterprises (STEs) on soybean imports to Korea. Traditionally, STEs have exercised exclusive rights to import the so-called strategic products, to ensure food security, domestic price stabilization, and import mark-ups. However, STE imports have been criticized on the grounds that industries using soybeans as a raw material are unable to obtain a diverse mix of quality material and cannot exercise the “right to choose” their own ingredients. Under a theoretical framework, a tariff equivalent of the STE is postulated to equate imports by private firms with imports by the STE. An empirical model is constructed and estimated using annual data spanning 1980–2009. The estimated results show that providing exclusive rights to imports has a negative effect on market access. When the STE pursues consumer welfare, the import-reducing effect turns out to be smaller than that in the producer welfare maximization case.

Is Monetary Policy in an Open Economy Fundamentally Different?

Openness requires optimal monetary policy to deviate from the canonical closed economy principle of domestic price stability, even if domestic prices are the only ones to be sticky. The paper reviews this argument using a simple partial equilibrium analysis in an economy that trades in final consumption goods. It then extends the standard open economy New Keynesian model to include imported inputs of production. Production openness strengthens even further the incentive for the policymaker to deviate from strict domestic price stability. With both consumption and production openness, variations in the world price of food and in the world price of imported oil act as exogenous cost-push factors.

Impacts of Trade Liberalization on Export Performance in Bangladesh: An Empirical Investigation

In the backdrop of persistent trade deficit, Bangladesh has been extensively liberalizing its trade regime since 1992 in order to achieve higher export performance and GDP growth. However, despite the liberalization, imports are still growing faster than exports, increasing trade deficit. The article empirically examines the impacts of trade liberalization on export performance in Bangladesh, using the ARDL ‘Bounds Test’ approach with annual time series data. Empirical results indicate that trade liberalization is having statistically significant but low impact on aggregate export. Neither capital stock as a technology transfers nor liberalization through reduction and withdrawal of export duties shows a significant impact on export performance. Exports are mostly stimulated by GDP growth. The interaction of liberalization with GDP increases exports a little, hence improving the trade balance. However, the liberalization enhances imports compared to exports hence the trade deficit. Therefore, a combined and consistent policy to promote GDP growth, technology transfers and domestic price stability, including education, infrastructures and backward linkage industries is essential in order to achieve higher export performance in Bangladesh.