Inflation Targeting Research Articles

Inflation and reproduction: the impact of inflation targeting on fertility in emerging economies

Inflation and reproduction: the impact of inflation targeting on fertility in emerging economies

Spatial dynamics of inflation in India: an econometric analysis

ABSTRACT The study examines whether inflation convergence across various states in India exists after the adoption of the Inflation Targeting (IT) using monthly data during 2011M01-2021M12. Compared to pre-IT, the number of states shows a rise in convergence, while the median half-life period declines during the IT period. Concerning convergence, we find multiple convergence in both pre-IT and IT periods. However, the number of states following the national trend is much greater in IT than in the pre-IT period despite COVID-19. The present results help policymakers envisage the possibility of augmenting uniform monetary policy with region-specific inflation management measures.

A Simple Measure of Anchoring for Short-Run Expected Inflation in FIRE Models

We show that the fraction of non-reoptimizing firms that index prices to the inflation target, rather than lagged inflation, provides a simple measure of anchoring for short-run expected inflation in a New Keynesian model with full-information rational expectations. Higher values of the anchoring measure imply less sensitivity of rational inflation forecasts to movements in actual inflation. The approximate value of the model’s anchoring measure can be inferred from observable data generated by the model itself, as given by 1 minus the autocorrelation statistic for quarterly inflation. We show that a shift in the collective indexing behavior of firms allows the model to account for numerous features of evolving U.S. inflation behavior since 1960.

Monetary policy and sentiment-driven fluctuations

Sentiments, or beliefs about aggregate demand, can be self-fulfilling in models departing slightly from the complete information benchmark in the New Keynesian framework. Through its effect on aggregate variables, the policy stance determines the degree of complementarity in firms' production (pricing) decisions and consequently, the precision of endogenous signals that firms receive. As a result, aggregate fluctuations can be driven by both fundamental and non-fundamental shocks. The distribution of non-fundamental shocks is endogenous to policy, introducing a novel tradeoff between stabilizing output and inflation. Both strong inflation targeting and nominal flexibilities increase the variance of non-fundamental shocks, which are shown to be suboptimal. Moreover, the Taylor principle is no longer sufficient to rule out indeterminacy. Instead, an interest rate rule that places sufficiently low weight on inflation eliminates non-fundamental volatility and thereby the output-inflation tradeoff.

Further evidence on inflation targeting and income distribution

AbstractThis paper examines the effect of inflation targeting (IT) on income distribution in a panel of 70 countries. Employing panel regressions and a variety of propensity score matching methods, we find strong evidence that incomes became more unequal in IT‐adopting countries relative to countries that did not adopt IT. Panel regressions suggest that Gini coefficients increased by 0.25%–0.57% and the share of income of the top 1% and 10% of households increased by 0.7% in IT adopter countries. Using propensity score matching methods, IT has been associated with a relative rise in Gini coefficients of about 1–2 percentage points, and a relative increase in the share of national income going to the top 1% and 10% of households by about 11–13 percentage points and 13–17 percentage points, respectively. The results are robust to changes in country sample and alternative estimation methodologies.

Testing Forecasting Properties of Different Approaches to Interval Forecasting (Using the Example of Inflation in Russia)

The paper contains the main results of the study of the quality of interval forecasts based on quantile regression and smooth quantile regression models relative to interval forecasts based on OLS models for Russian inflation. All models in the work were built from the logic of the possibility of forecasting in real-time, in connection with which the authors used inflation that was not cleared of seasonality in the expression month to the same month of the previous year. For each forecast horizon, the authors developed a separate model from lagged values of inflation and regressors so that the known values of lagged variables were always used on the right side of the equation.The authors tested a wide range of specifications – from very compact autoregressive models with one or two lags to wide ones with three additional regressors in addition to inflation lags. The best quality from the point of view of CRPS (Continuous Ranked Probability Score) metrics typical for such a task were the specifications that included the only additional variable – the USD/RUB exchange rate. As the confidence interval narrowed and at longer horizons, quantile and smooth quantile models became increasingly better relative to OLS models according to the CRPS metric.According to the authors, in the presence of inflation targeting, qualitative inflation forecasts can be used by the Bank of Russia in conducting monetary policy when forecasting future inflation dynamics and stress-testing the Russian economy. In general, this can help increase the economic agents’ confidence in the Bank of Russia within the concept of rational expectations

Understanding Deflationary Trends in China: Internal and External Factors Analysis

This paper investigates the recent deflationary trend observed in China, exploring its underlying causes from both internal and external perspectives. Since the 1970s, China has undergone significant economic reforms, embraced market principles and experienced a substantial expansion in its money supply. Despite expectations of inflation due to the substantial money supply relative to GDP, China has experienced a period of low or negative inflation rates since April 2023. This study examines potential factors contributing to this deflationary period, including exchange rate fluctuations, monetary policy dynamics, economic structural shifts, and external shocks. Furthermore, the paper evaluates the development of transmission routes of monetary policy and possible impacts on the responsiveness of price level to money supply, particularly within the context of China's evolving financial system. Additionally, it analyses shifts in the key drivers of the Chinese economyinvestment, net exports, and consumptionand their role in exacerbating deflationary pressures. The study extends its analysis to February 2024, observing potential signs of a transition away from deflation. It emphasizes the risks associated with deflation and the Chinese government's efforts to balance inflation targets with economic stability and employment objectives, particularly in light of challenges in the real estate sector.

Determinants of Household and Professional Forecasters’ Inflation Expectations in India

ABSTRACTThis study analyses and compares the determinants of inflation expectations among households and professional forecasters in India. To this end, we utilize quarterly survey data from the Reserve Bank of India (RBI), specifically the Inflation Expectations Survey of Households (IESH) and the Professional Forecasters’ Survey (SPF). The analysis employs a non‐recursive structural vector autoregressive (SVAR) model to explore the relationships between variables. The impulse response function and variance decomposition analysis shed light on the response of inflation expectations to macroeconomic shocks. Our findings indicate that apart from conventional macroeconomic factors like realized inflation and monetary policy, exogenous factors such as oil prices significantly shape inflation expectations. Comparing IESH and SPF, we found out that household expectations are more sensitive to shocks related to food prices, reflecting the influence of food expenses on household decision‐making. Conversely, professional forecasters’ expectations are more influenced by core inflation. Finally, we observed that inflation expectations adjust more quickly than realized inflation in response to macroeconomic shocks, suggesting a leading role. This study is novel with the contribution to the existing literature as it provides a comparative analysis of determinants of inflation expectations between households and professional forecasters in India, while also considering inflation targeting as a significant factor.

Factors Influencing Inflation: Insights from the Nepalese Economy

Inflation is a persistent issue in developing nations such as Nepal, resulting in serious economic and social consequences. This article examines the macroeconomic determinants of inflation in Nepal, considering the variables as government expenditure, exchange rate remittances, real GDP, and the consumer price index of India. Using the time series data from 1975 to 2023. It employs the Engel-Granger two-step cointegration test to examine the short- and long-term causal connections between Nepal's consumer price index (inflation) and all of these variables. The augmented Dickey-Fuller unit root test confirms that the variables are stationary at first difference, suggesting they possess an integrated order of I. The Engel-Granger test established that there is co-integration among the variables. Additionally, the error correction term (ECT) was found to be statistically significant, with a negative coefficient. The causal association between the selected dependent and explanatory variables in Nepal is both significant and persistent. The empirical findings suggest that India's inflation highly affects inflation in Nepal. Furthermore, the enduring effects of broad money supply and government expenditure are also substantial factors. The results indicate an inverse relationship between inflation and real GDP in Nepal, whereas remittances have no significant impact on consumer prices in the nation. So, it is vital to control inflation to be able to deal with poverty and economic growth. Policies are needed to keep the inflation target range around the optimum inflation rate to accelerate the pace of economic growth and ensure that the adverse effect inflation has on economic growth is minimized.

Exploring the nexus between inflation targeting and exchange market pressure: Evidence from the global financial crisis

This study investigates the effects of the inflation targeting (IT) monetary framework on the exchange market pressure index (EMPI) across 24 Asian economies from 1998 to 2018, with a particular focus on the period covering the global financial crisis (2008–2018). Employing dynamic panel data modeling and Propensity Score Matching, our analysis reveals a positive impact of implementing the IT on the EMPI. The findings suggest that adopting an IT regime effectively reduces exchange market pressure, demonstrating notable resilience following the global financial crisis of 2008. This highlights that an IT policy enhances the credibility of monetary policy, thereby decreasing the need for central bank interventions in the foreign exchange market within this framework.

Inflation targeting and monetary policy response in India

India adopted the Flexible Inflation Targeting (FIT) regime in 2016 under the mentorship of the Monetary Policy Committee (MPC). With FIT’s introduction, the effectiveness of monetary policy transmission channels required a re-visit and this paper is a valuable contribution in this direction. Using the multivariate model with an augmented Bayesian set- up, we find that FIT-MPC has strengthened the credit and interest rate channels while their impact on output has weakened. The impact of Operation Twist – a set of unconventional measures pursued during the pandemic is visible. Overall, the findings highlight the overhauling effect of monetary policy transmission in the Indian context.

THE IMPACT OF INFLATION TARGETING MONETARY POLICY ON MACROECONOMIC PERFORMANCE OF TURKEY DURING 2002-2022

The main aim of the study is to investigate the impact of inflation targeting (IT) strategy in Turkey during 2002-2022, which was adopted in a three-year period of 2002-2004, on macroeconomic performance (actual inflation, exchange and interest rates) and economic growth of Turkey (in terms of the real GDP). The econometric and empirical investigation of this research focusing on the impact of inflation targeting on the selected macroeconomic variables were carried out by the linear squares method (LSM) regression taking the data of the period after implementation of the monetary policy. At this, the independent variable of inflation targeting was estimated against each chosen macroeconomic variable separately in four different models to catch its linear impact on the changes of these variables over the period after implementation of the strategy. The empirical outcomes demonstrated that inflation targeting monetary policy is strong enough to impact the macroeconomic performance of Turkey in terms of reducing inflation rates, boosting economy by pushing real GDP to grow, stabilize exchange rates and lower the nominal interest rates on deposits.

Nominal GDP growth targeting vs. Taylor rules in a model with financial frictions

Nominal GDP growth targeting has gained favor over the last few decades in monetary policy literature (e.g., Ireland 2020; Garín et al. 2016; Beckworth and Hendrickson 2020). Calibrated, small-scale New Keynesian DSGE models have supported the proposition that nominal GDP growth (NGDP growth) rate targeting will improve welfare as compared with alternative strategies such as inflation targeting and Taylor rules with standard parameter settings. This paper examines that proposition in the context of a medium-scale New Keynesian model having a financial sector with frictions. In that model, NGDP growth rate targeting does poorly as compared with the Optimal Taylor rule and a wide range of Taylor rule settings leading up to the Optimal (representative agent utility maximizing) Taylor rule. The presence of the financial sector reveals that not only is NGDP growth rate targeting the least successful among the alternative targets and rules in creating welfare in this model; NGDP growth rate targeting also creates dramatically higher volatility of the policy rate and most financial variables.

Macroeconomic Analysis and General Economic Equilibrium of Kazakhstan

The paper studies general equilibrium in the economy of Kazakhstan. The purpose of the study is to estimate the equilibrium real interest rate for the economy within current frameworks. The IS-LMBP curves are plotted based on corresponding regression models of the real output measured by GDP. The exogenous variables are taken for the regressions according to the theoretical propositions. The quarterly data for 2008Q1-2022Q4 published in the datasets and bulletins of the Committee for Statistics and the National Bank of the Republic of Kazakhstan were used. Some consequences of the change in the exchange rate regime and in macroeconomic policy framework on macroeconomic relationships were revealed. Effectiveness of using interest rate as an instrument in maintaining inflation targeting policy is still ambiguous for the case of Kazakhstan. This study demonstrates the general equilibrium state of the national economy and specifications of the curves listed above. The results can be used to assign further the nominal interest rate using Taylor type rules

Central bank communication: Inflation target transparency with fiscal policy

AbstractThis article examines the impact of opacity in announcing the central bank's inflation target on macroeconomic volatility and welfare, considering the interaction between an independent central bank and a fiscal authority. Our findings suggest that a key factor influencing the effects of central bank transparency is the relative importance placed by the central bank, compared to the government, on output stabilization versus inflation stabilization. Specifically, when output stabilization is relatively more important for the central bank than for the government, full opacity may benefit the central bank, but not necessarily society as a whole.

Monetary policy transmission dynamics: evidence from Indian financial markets

ABSTRACT Our study employs a non-recursive Structural Vector Autoregressive Model (SVAR) to examine to how monetary policy signals transmit across the money, treasury bills, bonds, forex, and the stock market in India and in the process unravel the relative efficacy of various monetary policy signalling instruments on these financial market variables. This exercise is conducted for two distinct monetary policy regimes -Multiple Indicator Regime and Flexible Inflation Targeting Regime. Our results indicate that the transmission of monetary policy differs not only across various segments of the financial markets, but is also sensitive to the choice of monetary policy instruments used by the Reserve Bank of India (RBI) under different regimes. In a bid to heighten the efficacy of monetary policy signals it is hence suggestive that developing economies with high inflation should move towards an inflation targeting regime.

Singular spectrum analysis to estimate core inflation in Brazil

This paper presents a set of new core inflation measures for Brazil based on the Singular Spectrum Analysis (SSA) method. The measures are based on the official target used in the Brazilian inflation targeting regime. The period of analysis ranges from the beginning of the inflation targeting regime in 1999 and 2021. The SSA measures were compared to the inflation core ones used by the Central Bank of Brazil, through the evaluation of unbiasedness, short-term adjustment dynamics and predictive ability. The measures estimated by SSA meet the desired properties and have a greater predictive capacity than the other inflation cores.

Considerations on inflation, economic growth, and the 2 per cent inflation target

This paper considers two basic questions with respect to inflation control, inflation targeting, and overall macroeconomic performance. The initial question is: what has been the justification in research for establishing an inflation target, and specifically a low inflation rate target of 2–3 per cent, as the organizing principle and overarching goal of macroeconomic policy? The second question is: do we actually observe stronger macroeconomic performances – as measured in standard terms of gross domestic product (GDP) growth – when macro policy operates within the framework of such low inflation targets? Our answers to these questions are straightforward. First, no serious body of research has been produced that provides a clear justification for a 2–3 per cent inflation target as the central goal of macroeconomic policy. Further, there is no body of evidence showing that economies at any level of development consistently experience stronger economic growth outcomes when inflation is maintained at less than 3 per cent as opposed to higher inflation rates, certainly within a 4–5 per cent inflation range and, in some circumstances, somewhat higher rates still. These findings are significant insofar as they open space for considering the set of measures other than contractionary monetary policies as viable inflation control tools. It is possible that these other measures do not operate as forcefully as contractionary monetary policy in bringing inflation down to a 2–3 per cent target range. However, our findings suggest that it is not typically necessary to force down inflation to such low levels, especially given that contractionary monetary policies succeed in controlling inflation primarily through the channel of raising mass unemployment and weakening workers’ bargaining power.

Does Central Bank Transparency Matter for Inflation: Role of Inflation Targeting

This paper examines the relationship between central bank transparency and inflation for six inflation targeting (IT) and ten non-inflation targeting (non-IT) Asian economies. The propensity score matching and panel regression model are employed in the study. The empirical analysis shows that IT enhances central bank transparency. Further, we find that central bank transparency in IT significantly lowers inflation, suggesting that countries promoting greater monetary policy transparency can have a better advantage of experiencing low inflation. Our findings have policy implications for central banks in developing economies that are grappling with low transparency.

Asymmetry and non-linearity in exchange rate pass-through: Evidence from scanner data

Using retail scanner data from Kazakhstan, an emerging economy with significant and unexpected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pronounced when the exchange shock is small, aligning with the existence of menu costs. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation.