Implementation Of Inflation Targeting Research Articles

Dictionary-based sentiment analysis of monetary policy communication: on the applicability of lexicons

AbstractIn this study, we discuss central bank communication sentiments assessed using different dictionaries. Policy communication by monetary authorities is considered an essential additional policy tool. Various text-mining techniques could evaluate its sentiment. Dictionary methods are a prominent example here because they offer simplicity and are a starting point for applying more elaborate methods. We decided to test four lexicons: generic, economic and financial and two domain-specific lexicons to conclude on their applicability to assess the sentiments of monetary releases and provide recommendations for their further application. This study surveys four lexicons qualitatively and conducts a few exercises: lexicon content comparison, performance tests for highly positive and negative messages, and statistical tests of dictionary alignment and correlation. The sample covers small open economies implementing inflation targeting. The study concludes that all investigated dictionaries could be used for detecting central bank intentions: they do not return contradictory results. The choice among them for a particular study depends on the study’s setup and goals—as presented in our recommendations

Central bank communication and expectations: Evidence for inflation‐targeting economies

AbstractWe seek to investigate the effects of communication by central banks on professional and consumer inflation expectations. Accordingly, we investigate 12 small open economies implementing inflation targeting. The communication tone of the central banks is determined based on their post‐decision releases. We use computational linguistics to quantify this factor. With regard to two subsamples that are identified based on the central bank's experience in inflation targeting, we estimate panel models while controlling for other prospective drivers of expectations. The communication tone of a central bank significantly affects the expectations of professional forecasters from economies with more experience in inflation targeting.

Optimal monetary policy under bounded rationality

We develop a behavioral New Keynesian model to analyze optimal monetary policy with heterogeneously myopic households and firms. Five key results are derived. First, our model reflects coherent microeconomic and aggregate myopia due to the consistent transition from subjective to objective expectations. Second, the optimal monetary policy entails implementing inflation targeting in a framework where myopia distorts agents’ inflation expectations. Third, price level targeting emerges as the optimal policy under output gap, revenue, or interest rate myopia. Under price level targeting, rational inflation expectations are a minimal condition for optimality under bounded rationality. Fourth, bounded rationality is not necessarily welfare-decreasing and is even associated with welfare gains for extreme cognitive discounting. Finally, our empirical results point to the behavioral model’s superiority over the rational model.

Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan


 
 
 
 
 This paper makes twofold contributions. First, it critically reviews empirical literature along the key dimensions of inflation targeting (IT)—skepticism/critique to ascertain whether such skepticism is a myth or reality. Second, it critically reviews the so-called preconditions and operational prerequisites of IT and evaluates Pakistan’s existing state to draw lessons on whether Pakistan is in a position to adopt IT successfully. Contrary to the skeptic’s views, the review indicates that by and large the benefits of IT are promising not only in terms of macroeconomic performance—as measured by inflation, output, interest rate, exchange rate and their variants—but it also allows flexibility to effectively deal with real, financial as well as external sector shocks. The current state of preconditions and operational prerequisites in Pakistan seems adequate, which better positions the State Bank of Pakistan (SBP) to adopt IT. Statutory prioritisation of price stability, consistent inflation targets, and strict accountability mechanisms as well as aggressive disinflation need to be improved for successful implementation of IT.
 
 
 
 

Do words affect expectations? The effect of central banks communication on consumer inflation expectations

In this paper, we sought to investigate the effect of communication by central banks on consumer inflation expectations. To this end, we ran investigations into six European economies that, between 2010 and mid-2019, implemented inflation targeting: the Czech Republic, Hungary, Poland, Romania, Sweden, and the UK. Consumer inflation expectations were derived from qualitative surveys and quantified by probabilistic method. The communication tone of the central banks was derived from their minutes. We applied the textual method and latent Dirichlet allocation technique to derive minutes content that describes decision and underling economic conditions. For the sample collected, we estimated, controlling for past inflation and industrial production index, panel models. As some data proved to be fractionally integrated, we applied double filtering using the autoregressive fractionally integrated moving average method to account for autocorrelation followed by multilevel modelling. We estimated the model for two vectors of controls and four lexicons. The results suggest that the communication tone of a central bank affects consumer inflation expectations. However, the direction of relationship is conditional on dictionary.

The impact of the inflation-targeting regime on the economic development of an industrial region

The priority goal of Russia’s monetary policy is keeping inflation close to the target. Within the inflation-targeting regime, the monetary policy is adopted at the national level and therefore, is uniform for all regions of the country. However, differentiation of inflation rates between regions characteristic of Russia’s economy gains even greater importance under the enacted policy, because inflation targeting produces different effects on the sustainability of the economic development of regions with different industrial structures. The paper aims to study the impact of the inflation-targeting regime on the economic performance of the Sverdlovsk oblast, which belongs to old industrial regions. The methodological basis of the research consists of the theoretical propositions of economic theory and macroeconomics. The authors use correlation and factor analysis, methods of observation and comparison. According to the findings, implementing inflation targeting since 2015 has permitted to reduce inflation and keep it down in the Sverdlovsk oblast. However, it has also contributed to the deterioration of the key indicators reflecting its economic development. The study concludes that despite being effective in terms of reducing inflation, the said regime impedes sustainable economic development of the industrial region.

Do words transform into actions? The consistency of central banks? communications and decisions

Research background: This study investigates central banks? (CB) intentions as reflected in their minutes and their relationship with policy decisions. Although CB communication is an inherent part of their inflation targeting (IT) strategy, their communication does not necessarily result in actions. Purpose of the article: This study aims to extract policy intentions from central bank minutes and juxtapose these with actual policy decisions to investigate the consistency of their words and deeds in a comparative context. Additionally, we compare the applicability of three dictionaries in policy communication assessments. Methods: Computational linguistics and textual methods are applied to create proxies for tone from a large dataset of texts. A transformation of words into time series involves the application of a general economic dictionary and two monetary policy-adjusted dictionaries. We examine the association between tone and actual CB decisions with the eta squared coefficient. The research covers 15 European CBs, divided into three subgroups according to the CB experience in inflation targeting. The sample starting points differ as they relate to each country?s IT implementation year; the analysis ends in mid-2019. Findings & value added: This paper?s value added is firstly methodological, as we test three dictionaries to determine their usefulness. Statistical and qualitative analysis allows us to conclude about superiority of monetary policy specific lexicons for this kind of studies. The extra value added is about the study?s coverage: it covers a large sample and provides a broader illustration compared to most previous examinations. Our results suggest that a relationship exists between communications and actions, although the weakest for late joiners to IT. The latter group of CBs needs to strengthen communication practices. In experienced inflation targeters the short run dimension of credibility exists and opens the room for creating effective monetary policy in terms of managing the expectations of a general audience.

ПРОЦИКЛИЧЕСКАЯ ПОЛИТИКА ЦЕНТРАЛЬНОГО БАНКА АРМЕНИИ: ЦЕНА ВОПРОСА

This article is devoted to the analysis and evaluation of monetary regulation based on the pro-cyclical policy approach in terms of the impact on economic growth on the example of the Armenian economy. The result of the study was the conclusion that procyclical monetary policy has a negative effect on the economy, which in turn requires a revision of such a policy for countries with emerging markets, in particular in Armenia. An analysis of the monetary and foreign exchange policies of Armenia proves that, since the implementation of inflation targeting, the Central Bank of the Republic of Armenia has been pursuing a pro-cyclical policy, which has led to a slowdown in economic growth, especially in the long term.

Why did inflation targeting fail in Argentina?

Argentina’s experience with inflation targeting started in 2016 and ended in 2018, lasting a total of only 25 months. In this paper, we study the reasons why this monetary regime failed in Argentina. We argue that the main reason for its failure was an internal inconsistency in how the central bank implemented inflation targeting, and a negative credibility shock accelerated that said inconsistency in December 2017.

STOCK MARKET COINTEGRATION AND DIVERSIFICATION OPPORTUNITIES UNDER INFLATION TARGETING REGIME

Monetary authorities use monetary policy to achieve their objectives. Keeping inflation stable, at low levels is the main objective of central banks. While central banks use monetary policy to control inflation, its decisions also impact the overall economy and financial market. The aim of this paper is to investigate the diversification opportunities in 17 developed and emerging market economies that have implemented inflation targeting. By using Johansson cointegration and Gregory Hanssen tests we investigate the existence of long run co integration relationship between different markets. Moreover, we investigate the short run diversification opportunities by analyzing the short run exposure of each stock index to the S&P 1200 Global Index. The results of our study suggest that stock markets of Brazil and Czech Republic offer very good diversification opportunities, while the Colombian stock market offers very limited diversification opportunities as Colombia stock index has co integration relationship with almost other indices. 
 
 JEL: G15, G11
 
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The Linkages between Inflation and Inflation Uncertainty in Selected Asian Economies: Evidence from Quantile Regression

This paper examines inflation-inflation uncertainty nexus in both inflation targeting and non-inflation targeting economies in Asia. Using monthly data from 1979M1 to 2019M12, the AR(p)-EGARCH model is used to generate inflation uncertainty series. In addition, quantile regression is employed to examine the linkages between inflation and inflation uncertainty in nine Asian countries. The results show that inflation positively causes inflation uncertainty in all economies regardless of whether economies have implemented inflation targeting or not. The Friedman-Ball hypothesis is thus supported. In addition, inflation uncertainty positively causes inflation in most economies. Therefore, the Cukierman-Meltzer hypothesis is likely to be supported. The findings signal the possibility of the real cost of inflation for these economies.

The Impact of Price Dynamics in Russia on Monetary Policy and Economic Development

The article is devoted to the analysis of how inflation works in the Russian economy. The structural aspect of the formation of price dynamics, the differences in how the consumer price index and producer price index are formed, the obstacles to the effective implementation of inflation targeting are considered. Various aspects of the formation of inflationary dynamics are analyzed taking into account the indicators of financial activity of enterprises. Approaches are proposed that improve the quality of enterprise surveys on assessing inflation expectations.

An empirical analysis on the effects of the inflation targeting framework on monetary policy in South Africa

AbstractThis article examines the impact of the adoption of an Inflation Targeting (IT) framework in 2000 on the conduct of South Africa’s monetary policy. Taylor rule analysis is used to test empirically whether the implementation of IT in South Africa can be shown to have impacted on the conduct of monetary policy. In particular, the article analyses whether the implementation of the IT framework yields the expected changes when comparing the conduct of monetary policy pre and post the adoption of the IT framework. Thereafter, an analysis of term structure of interest rates, which serve as a proxy variable for market expectations, is used to test whether South Africa’s IT framework has resulted in more predictability and transparency in monetary policy conduct. Lastly, the article analyses the impact of the global financial crisis of 2008–2009, the so‐called Great Recession, on the predictability and transparency of monetary policy in South Africa.

Inflation targeting and output-inflation tradeoffs

This article assesses whether the adoption of inflation targeting (IT) helps reduce the output-inflation tradeoff. We address the self-selection problem of IT policy adoption by the endogenous switching regressions, and show that the output-inflation tradeoffs are significantly lower in IT countries not only over the whole sample but also across the developed and developing country subsamples. In addition, we also find strong evidence supporting the positive selection hypothesis, i.e., countries have higher probability of adopting IT are exactly those who benefit more (larger reduction of output-inflation tradeoff) from the implementation of IT. Additional results reveal that economies with higher trade openness, lower financial openness, and less flexible exchange rate regime are associated with larger tradeoff between output and inflation, but the effects are only statistically significant in the IT regime.

Evaluation of Endogeneity of Money Supply under Inflation Targeting Implementation in Turkey

This study aimed to question how successful the CBRT could be in the process of determining the money supply by acting in all these motivational conditions. To achieve this aim M3 as a proxy variable to the money supply, the banking sector loan volume as a proxy for the money demand has been dealt with. The study tested the causality relationship between variables using the Granger Causality Test and Error Correction Model. According to the results of the Granger Causality Test, in the long run, the direction of causality between the money supply and credit expansion is straightforward from the money supply to the credit extension. According to the findings of the Error Correction Model, there is a positive and statistically significant relationship between money supply and credit expansion in the short term. Credit expansion increases money supply.

Price Stability and Inflation Targeting in Commodity Economies: Macroeconomics versus a Political Economy?

In this study, the author argues that maintaining price stability in commodity economies is influenced by their resource rent distribution and that economic stability is extremely sensitive to the nature of a political regime. The commodity factor alone is shown not to be an impediment to maintaining price stability and implementing inflation targeting. An empirical analysis based on data from 68 resource-rich countries provides evidence that the link between the timing of the implementation of inflation targeting and resource wealth variables is not skewed towards resource-poor countries. This study finds that among democracies, inflation targeters demonstrate the best price stability parameters, the most flexible exchange rates, more independent central banks, and more diversified economies, while among autocracies, the best parameters are seen in countries that have sovereign wealth funds.

Inflation - Growth Nexus in Sri Lanka: is there a Threshold Level Of Inflation for Sri Lanka?

It is of significant economic importance to investigate the relationship of the inflation-growth nexus in Sri Lanka, to identify whether there is a linear or non-linear relationship between the two macro variables. This can lead to the discovery of the threshold level of inflation for Sri Lanka. Accordingly, this research explores the inflation-growth relationship in Sri Lanka, using annual data from 1965 to 2014. The results reveal an inflation rate of 9 per cent, which maximises the per capita GDP growth rate in Sri Lanka. However, the results do not confirm any significant structural break in per capita GDP growth rate when the inflation rate exceeds 9 per cent. Therefore, based on the findings, there is no statistically significant evidence to suggest the existence of a non-linear relationship between per capita GDP growth and inflation in Sri Lanka. Some conjectures, such as errors in data and not including savings and investment data can be made regarding the non-existence of a significant inflation threshold. Furthermore, the findings highlight that there is no negative effect of inflation towards the GDP per capita growth at any rate of inflation in Sri Lanka. This is an indication that any adverse effects of contemporaneous inflation are neutralized due to the significant positive effects from the inflation lag of two years. Furthermore, the results are not in favour of the view of maintaining inflation at low levels and thus, this study is important for policymakers in Sri Lanka, when implementing inflation targeting in Sri Lanka in the future.

Canadian inflation targeting

AbstractThis paper examines the intellectual environment in Canada that led to the adoption of inflation targets starting in 1991, reviews some of the Canadian contributions to the vast literature on inflation targeting and presents evidence in support of the view that the implementation of inflation targeting in Canada has been particularly successful when compared with the experiences of other inflation‐targeting countries and the US.

Level, structure, and volatility of financial development and inflation targeting

Abstract This article, by synthesizing the inflation targeting (IT)-inflation and inflation-finance linkages, assesses whether the adoption of IT exerts any significant impacts on financial development (in terms of level, structure, and volatility). By using data on 74 countries over the 1980–2010 period, the empirical results indicate that adopting IT is associated with higher development of banks, stock markets, insurance sectors, and bond markets in the developing but not in the industrial economies. In addition, we show that the implementation of IT leads to a more market-oriented financial system in both developed and developing countries, and a more stable process of financial development in the developing subsample. Finally, our evidence also reveals that countries with a lower, instead of a higher, probability of adopting IT are exactly those who benefit most from implementing such a monetary framework.

Settling the Inflation Targeting Debate: Lights from a Meta-Regression Analysis

Inflation targeting (IT) has gained much traction over the past two decades, becoming a framework of reference for the conduct of monetary policy. However, the debate about its very merits and macroeconomic consequences remains inconclusive. This paper digs deeper into the issue through a meta-regression analysis (MRA) of the existing literature, making it the first application of a MRA to the macroeconomic effects of IT adoption. Building on 8,059 estimated coefficients from a very broad sample of 113 studies, the paper finds that the empirical literature suffers from two types of publication bias. First, authors, editors and reviewers prefer results featuring beneficial effects of IT adoption on inflation volatility, real GDP growth and fiscal performances; second, they promote results with estimated coefficients that are significantly different from zero. However, after filtering out the publication biases, we still find meaningful (genuine) effects of IT in reducing inflation and real GDP growth volatility, but no significant genuine effects on inflation volatility and the level of real GDP growth. Interestingly, the results indicate that the impact of IT varies systematically across studies, depending on the sample structure and composition, the time coverage, the estimation techniques, country-specific factors, IT implementation parameters, and publication characteristics.