Domestic Price Stability Research Articles

Price development in Albania

Even though inflation has been low in the last years in Albania and inside the target rate of about 3 percent determined by Bank of Albania, considering the relevance of this variable for economic activity there is room for careful analysis in order to make evident the potential threatens of domestic price stability. The main objective of this paper is twofold, first analyzing sub-indexes of CPI basket in order to determine the major volatile components, and second aim is to qualify the relative importance of different transmission mechanisms of monetary policy, by using VAR approach. The main finding of this work is that rent fuel and power that constitute the second large sub-indexes of CPI with the weight 24 percent have been the most volatile categories for time period 2000-2008, followed by food sub-index that has the highest weight in Albania CPI basket of about 43 percent. Econometric model has found evidence that money supply is important determinant factor for domestic inflation. There is an immediate response of inflation to shocks in the exchange rate. Even though the exchange rate continues to be an important variable for explaining inflation in Albania, with the development of financial market its importance will decrease. Total loans to GDP ratio in Albania have increased substantially in the last year, and we believe that the importance of lending channel will further increase in Albania with the development of financial market.

Adaptational Pressure, Domestic Politics and the Evolution of the European Monetary System

Extant literature on EMU fails to explain why European countries chose it at the expense of other alternatives that might have been equally promising. I argue in this article that the transition to EMU was facilitated by the factors associated with the paradoxical nature of the successful EMS: adaptational pressure and domestic political conflicts. Adaptational pressure refers to the increasing vulnerability to monetary policy differentials within EMS. The EMS could be successful due to the policy convergence on disinflation. Yet, this convergence rendered member countries more vulnerable to monetary policy differentials within the EMS. The EMU was envisioned as a solution to the rising costs of policy adaptation that was brought about by the successful EMS. Against this backdrop, domestic political actors were sharply divided over the appropriate monetary policies. Those political actors who committed themselves to domestic price stability found in the EMU a vincolo esterno (external tie) to engineer otherwise elusive domestic reform.

Monetary Policy Operations of Debtor Central Banks in Mena Countries

The paper analyses the monetary policy operations of central banks in the Middle East and North Africa (MENA). We distinguish the pattern of monetary policy operations of the liquidity providing central banks of the large industrialized countries (creditor central banks) and the liquidity absorbing central banks of emerging market economies (debtor central banks). Many debtor central banks provide liquidity through foreign exchange intervention in reaction to foreign exchange inflows. If the respective liquidity expansion is regarded as a threat to domestic price and financial stability, liquidity is partly absorbed through sterilization operations. The paper finds that most MENA countries are debtor central banks due to a general pattern of excessive liquidity creation as well as due to country specific reasons.

International dimensions of optimal monetary policy

This paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities. An inward-looking policy of domestic price stabilization is not optimal when firms’ markups are exposed to currency fluctuations. Such a policy raises exchange rate volatility, leading foreign exporters to charge higher prices vis-à-vis increased uncertainty in the export market. As higher import prices reduce the purchasing power of domestic consumers, optimal monetary rules trade off a larger domestic output gap against lower consumer prices. Optimal rules in a world Nash equilibrium lead to less exchange rate volatility relative to both inward-looking rules and discretionary policies, even when the latter do not suffer from any inflationary (or deflationary) bias. Gains from international monetary cooperation are related in a non-monotonic way to the degree of exchange rate pass-through.

Monetary Policy Making: Challenges in an Open Economy

Whether Central Bank should habitually intervene or should not intervene at all with the exchange rate movements is a burgeoning question. If we accept intervention, the question arises as to what should be the extent of Reserve Bank of India's intervention to contain the expansionary impact of global capital inflows? The ramifications of 'RBI's intervention' has given rise to many complexities which need exploration. This will help to delineate the possible mechanisms to overcome the trade-off between the various objectives of monetary policy. Indian experience reveals that the large inflows of foreign capital put upward pressure on exchange rate; monetary expansion resulting from intervention tends to exert upward pressure on domestic price level. This raises the issue of an appropriate exchange rate policy and price policy. There is, thus, an imperative to study the various monetary policy instruments, goals and policy variables in the wake of the changed scenario. The research paper inter alia would focus on the following: · Reasons involved towards changing character of 'reserve money'; · Emerging challenges in terms of 'exchange rate management' and 'domestic price stability'; · An analysis of the efficacy of the existing instruments used to tackle the challenges; · To suggest alternative policy options for tackling challenges.

Managing the Euro

For a year following the launch of the euro, the European Central Bank (ECB) seemed indifferent to the currency's depreciation. Then the ECB changed to a policy position of trying to bolster the external value of the euro. This paper seeks to explain these patterns of positions on the ECB's external monetary policy. I argue that the ECB's policy on the exchange rate is a function of its commitment to domestic price stability in the euro zone. In other words, the ECB's concern with the euro's exchange rate centers solely on what that exchange rate can do to inflation. This focus on price stability is a function of the interests of the ECB in maintaining its own image of competence in European society.

India’s trade balance: the role of income and exchange rates

This study estimates the balance of trade model on Indian data from 1960 to 1995 using a reduced-form specification similar to Rose [J. Int. Economics, 30 (1991) 301]. The results show that the real exchange rate (trade weighted) and domestic income play a significant, while the world income plays an insignificant or a less significant role in affecting the balance of trade in India. The trade effects of real exchange rate are different from those of nominal exchange rate. The study suggests the need to monitor the real rather than nominal exchange rate, and in this major focus is required on weighted and more specifically the trade weighted real effective exchange rate. Besides, the devaluation-based adjustment policies need to be supplemented by stabilisation policies to ensure domestic price stability and achieve the desired effects of nominal exchange rate changes (devaluation) on the balance of trade.

Liberalized trade and domestic price stability. The case of rice and wheat in India

This paper analyzes the effects of liberalizing foodgrain trade on domestic price stability using a multi-market equilibrium model in which the direction of trade is determined endogenously and world prices are sensitive to the amount traded by India. Simulation results demonstrate that contrary to popular belief, freeing of trade by India leads to greater domestic price stability even though world prices are more volatile. Freeing of trade by India also leads to higher world price stability. Under liberalized trade, variable levies/subsidies are more effective in stabilizing domestic prices compared to buffer stocks. It is therefore in India's interest to argue for non-zero binding on import tariffs and export subsidies at the WTO negotiations.

Indonesian Monetary Policy During the 1997–98 Crisis: A Monetarist Perspective

This paper defends the IMF's strategy of targeting base money (M0) in 1997–98 against the criticism by Grenville (2000) that it was destined to fail because M0 is mainly demand determined and the demand for it was increased by a large and unpredictable amount by the banking panic. Grenville contends that Indonesian monetary policy should have aimed at domestic price stability. It is argued here that the growth of M0 far exceeded what could be justified by last resort lending to accommodate the banking panic, and that rapid inflation could only have been avoided by preventing most of the expansion of the public's cash holding that actually occurred. Achieving a modest target for domestic inflation would not therefore have been very different in practice from setting tight limits on the growth of M0. In contrast, both these policies would have been very different from the loss of control over M0 that actually occurred.

China's exchange rate policy

Should or will the yuan depreciate? This is an important question widely speculated in world financial markets and intensively debated in China in the wake of the East Asian financial crisis in 1997. The present paper examines in detail the fundamentals that determine the exchange rate in China and concludes with two important findings. One is that the past two decades of economic reform has made domestic prices in China sufficiently market-determined and linked to world prices so that the exchange rate can serve as an effective nominal anchor. Exchange rate stability leads to domestic price stability. The other result is that because of the flexibility of domestic prices, a change in the exchange rate has only a modest and ephemeral effect on the terms of trade and trade flows. Therefore, exchange rate flexibility is not essential to keep the current account in balance. Such evidence suggests that China should continue the policy to maintain exchange rate stability, as it has done since 1994.

Case Of The Rebate Tax Or Flexible Certificate-cert

Colombia has politically struggled to launch a consistent and long-term export promotion policy. It has been a successful, not partisan and realist policy. Government initiatives have been oriented to mitigate market distortions introduced by fluctuating terms of trade of Colombian commodity prices in the international market. This paper explores suggestions made to the Colombian Government about the convenience of incorporating in the Colombian Legislation a new normative to stabilize export business activity, mainly preserving for the domestic producer long-term relative price stability. Also to encourage the export of services, activity that has not been regulated prior to the law issue. The paper proposed the establishment of an independently government activated tax rebate based on counter-cyclical price movements to stabilize exporters real income, affected by systemic prices and exchange rate fluctuations. Government officers and interest group institutions discussed the argument, before this political and economic architecture derived into the expedition of Ley Marco de Comercio Exterior. Framework Law 48 of 1.983, empowered the Executive to legislate in trade related matters, thus introducing a flexible mechanism to correct systemic market fluctuations in exporters? favor. Short-term consequence of this normative improvement was duplication of dollars exported value in less than a decade.

Grain price stabilization in India: Evaluation of policy alternatives

AbstractStabilization of prices is an important element of food policy in India as in most other countries — both developing and eveloped. However, since the magnitude of grain stocks held for this purpose as well as the costs of physical storage have become prohibitively high, there is now a need for finding cost‐effective alternatives including non interventionist and market‐oriented methods for price stabilization. In this paper we consider the case of rice and wheat which are staple foodgrains in India. We make a comparison between alternative price stabilization policies including that of holding buffer stocks in terms of their impact on domestic price stability, producer and consumer welfare and government costs. A multi‐market equilibrium framework is used where private storage, consumption, supply and prices of rice and wheat are determined simultaneously. Indian exports and imports are assumed to affect world prices. The alternative price stabilizing mechanisms are ranked according to both the criteria, welfare and price stability achieved. The main findings are as follows. The ranking of alternatives varies with the criterion used. Greater price stability need not necessarily imply greater welfare. The option of variable levies on private external trade turns out to be the most inexpensive and that of domestic buffer stocks the costliest in achieving price stability. Further, the efficacy of buffer stocks and subsidy to private storage in stabilizing prices is lower under free trade as compared to the case where the economy is closed to private external trade.

Grain price stabilization in India: Evaluation of policy alternatives

Abstract Stabilization of prices is an important element of food policy in India as in most other countries — both developing and developed. However, since the magnitude of grain stocks held for this purpose as well as the costs of physical storage have become prohibitively high, there is now a need for finding cost-effective alternatives including non-interventionist and market-oriented methods for price stabilization. In this paper we consider the case of rice and wheat which are staple foodgrains in India. We make a comparison between alternative price stabilization policies including that of holding buffer stocks in terms of their impact on domestic price stability, producer and consumer welfare and government costs. A multi-market equilibrium framework is used where private storage, consumption, supply and prices of rice and wheat are determined simultaneously. Indian exports and imports are assumed to affect world prices. The alternative price stabilizing mechanisms are ranked according to both the criteria, welfare and price stability achieved. The main findings are as follows. The ranking of alternatives varies with the criterion used. Greater price stability need not necessarily imply greater welfare. The option of variable levies on private external trade turns out to be the most inexpensive and that of domestic buffer stocks the costliest in achieving price stability. Further, the efficacy of buffer stocks and subsidy to private storage in stabilizing prices is lower under free trade as compared to the case where the economy is closed to private external trade.

Dynamic Causal Chain of Money, Output, Interest Rate and Prices in Malaysia: Evidence Based On Vector Error- Correction Modelling Analysis

The dynamic causal chain among money, real output, interest rate, and inflation is Reexamined in the context of a small fast-growing economy using the recently developed techniques of Johansen's multivariate conitegration analysis followed by vector error-correction modelling, Granger causality, variance decompositions, and impulse response functions. The results of the multivariate cointegration tests suggested a stable long-run equilibrium relationship exists among these macroeconomic variables. The short-run results based on vector error-correction modeling, on the other hand, support the New Keynesians' view that money is non- neutral, at least in the short-run. It also indicates that monetary policy can contribute to the stability of domestic prices. M1, among the various definitions of money stock, has been identified as the most effective intermediate monetary target to curb inflation. M3, in turn, has been suggested as the most appropriate intermediate target to promote sustainable economic growth with contained inflation. For this economy, the deviation of the macroeconomic activity from its long-run equilibrium is adjusted through changes in the money stock and prices [E44]

Exchange Rate Policy and Market Power: A General Equilibrium Analysis for Singapore

A computable general equilibrium (CGE) model of the Singapore economy is simulated to project the impact of the appreciation of the Singapore dollar under different export demand elasticity scenarios. The macroeconomic and sectoral results are not very sensitive to variations in the export demand elasticities over the elastic range. A significant change in the projections is apparent when highly inelastic export demand curves are adopted. These results are consistent with the economic performance of Singapore over recent years under the strong currency regime. The analysis thus supports the belief that Singapore is coming to enjoy some degree of market power in the world trade of manufactures. 1 Introduction The Singapore dollar has appreciated since 1980 against all other main currencies. This is an outcome of a deliberate policy that has been aimed at insulating domestic prices from imported inflation. Prior to the 1985 recession, the burden of the anti-inflation policy was placed on wage restraint under the National Wage Council guidelines. However, this wage policy became unsustainable due to the tight labour market situation and the growing significance of a relatively labourintensive service sector in the national economy. While the Singapore Government has recognized the causal link between real wage costs and international competitiveness, it has accepted its limited ability to influence money wages as an anti-inflationary instrument as the economy tends to mature. It is in the light of this setting that the exchange rate has become an intermediate target of monetary policy and the domestic price stability as its final target. The monetary authorities of Singapore aim to keep inflation low and stable, which means at less than 3 per cent. In setting this target, the current and projected inflation pressures are taken into consideration. In the case of the latter, the medium-term outlook for both foreign inflation and domestic unit labour costs play a significant role. If these factors are likely to accelerate the inflation to unacceptable levels, the exchange rate is allowed to appreciate sufficiently to reduce imported inflation. The appreciation is also expected to dampen domestic demand pressure in order to maintain domestic price stability (Bercuson 1995). The precise impact of this exchange rate movement on reducing domestic inflation and the country's performance in external trade are dependent to a large extent upon Singapore's market power in world markets. Given the fact that Singapore's exports, mainly manufactures, account for about 1.5 per cent of the world exports' and retained imports represent 1.7 per cent of world imports, the small country assumption seems applicable to its international trade. However, there is uncertainty over export demand elasticities associated with manufacturing exports because accurate estimates of such elasticities are very scanty for a country like Singapore (Athukorala and Riedel 1991).2 In this article we attempt to use a computable general equilibrium (CGE) model of the Singapore economy (Siriwardana 1991; 1997) to simulate the impact of the appreciation of the Singapore dollar by adopting different values of export demand elasticities. The CGE methodology is a useful technique to gauge the sensitivity of the exchange rate policy to different export demand scenarios, especially when the magnitude of the relevant elasticity parameters is uncertain. It is observed that the model projections are not very sensitive to variations in the export demand elasticities over the elastic range. When extremely low values are adopted (that is inelastic export demand curves), there is a significant change in the projections. The article is organized as follows: section 2 provides a brief outline of the main structural features of the Singapore economy. In section 3, a description of the CGE model of the Singapore economy is presented. …

Rulers of the game: central bank independence during the interwar years

Central bank independence is associated with restrictive monetary choices that can be deflationary within fixed exchange-rate regimes. Because central banks act to counteract domestic inflation, they put a premium on domestic price stability at the expense of international monetary stability. Evidence from fifteen countries between 1925 and 1938 shows that the more independent central banks took more deflationary policies than were necessary for external adjustment. Central banks in general were more restrictive under left-wing governments than they were under more conservative regimes and often were more restrictive than required for external equilibration. This suggests that policies of independent central banks designed to enhance domestic price stability may force deflationary pressures onto other states in the system and potentially destabilize a fixed exchange-rate regime.

KOHL, REAGAN, AND OPEN ECONOMY MACROECONOMICS: REVISITING RULES FOR FISCAL AND MONETARY POLICY

THIS PAPER models three alternative policy strategies for an open economy and evaluates their performance. By doing this we revisit an old debate which was popular in the mid-80s, when tight monetary policies in the US and the UK brought down inflation but also appreciated the exchange rate and helped to cause large current account deficits. This issue may re-emerge in new guise in Europe. The current German fiscal situation post unification bears an uncanny resemblance to the Reagonomics of a decade ago. Moreover the tight monetary policy of the Bundesbank has generated a DM appreciation which, some have argued, is a misalignment that will undermine competitiveness.' These policies are examples of what we call open economy monetarism: national monetary policies used to achieve domestic price stability, without any supporting fiscal policy, and without any concern for external balance. Williamson (1987) argued that such policies may cause real exchange rate misalignments and unsustainable trade imbalances, and proposed that monetary policy should aim to achieve external balance by ensuring that exchange rates are moved towards the fundamental equilibrium values necessary to generate current account balance. In this second framework fiscal policy would at the same time aim to achieve internal balance, including domestic price stability. This proposal took the old Mundell assignment prescription for a fixed exchange rate world and applied it to a world of flexible exchange rates. We label this view the 'orthodox assignment'.2 By contrast Boughton (1989) and Genberg and Svoboda (1988) saw no need to disengage monetary policy from the pursuit of price stability, but argued that governments should be concerned with current account imbalances, in as much as they imply suboptimal national savings. In this third policy strategy the Williamson assignment would be exactly transposed. This has become known as the 'reversed assignment'.

Chile: the political economy of development and democracy in the 1990s

Many former members of the democratic opposition to the Augusto Pinochet regime (1973-1990) now find it difficult to separate its largely successful free-market economic model from the repressive political climate under which the model was implemented. Can the economic successes of the free-market model - based on policies recommended and implemented by the so-called Chicago boys for the former military government - survive after the restoration of civil, political and human rights in full? David E. Hojman addresses this key question and assesses the changes of economic - and political - success for the current administration of Patricio Aylwin and for future democratic governments. Chile: The Political Economy of Development and Democracy in the is a wide-ranging study, drawing from the extensive scholarly literature and data already published on Chile, as well as from the author's own research. Hojman discusses Chile's economy in the late 1980s and early 1990s by focusing on specific issues concerning the nation's agriculture, education, health care, housing, labour markets, income distribution, the role of the state, copper, inflation, investment and debt policies, and on the particular situations regarding the status of women, the poor and the middle sectors. At the beginning of the 1990s, he argues, Chilean society is facing a turning point, at which a unique opportunity for successful economic development under conditions of political democracy has arisen. Will Chile be able to succeed in achieving fast, enduring economic growth, together with domestic price and external sector stability and still continue to improve income and wealth redistribution, and preserve and enhance political democracy?

Uncertainty, Price Stabilization and Welfare

This paper investigates whether a small country facing foreign price instability benefits from active stabilization of the domestic price of the importable. For example, the European Community can be treated as a small open economy facing price instability of agricultural products originating in the United States. A tariff is out of the question because it is not optimal for a small open economy. However, the European Community may stabilize the domestic price of the importable. It is shown that, if the random tariff revenue ex post, domestic price stabilization increases income instability and nonintervention is optimal. If an ex ante rebating scheme is employed, a small country can benefit from domestic price stabilization and there exists a partial stabilization policy that dominates free trade. Partial stabilization of the domestic price with the ex ante rebate requires a variable import levy inversely related to the foreign price of the importable. However, complete stabilization of domestic price, which requires setting a target price and a variable import levy as currently used in the European Community, is not optimal.

Domestic Price Stabilization Schemes in Developing Countries

Preoccupation with the presumed adverse effects of price instability has led developing countries to establish a wide variety of mechanisms to stabilize domestic prices, not only of internationally traded goods but of nontraded goods as well. However, despite the ubiquity of such schemes, and the obvious importance with which price stabilization is regarded, the development literature is virtually mute on their characteristics and how they have performed.' In this article, we discuss the topic of domestic price stabilization programs in a comparative cross-country context. We do not examine here the question of whether instability has adverse or positive economic effects, as a burgeoning literature continues to debate this issue. Rather, we take as given that stabilization is a desideratum of virtually all governments in the developing world. Our goals are to describe some of the characteristics of the different schemes used to stabilize