Inflation Targeting Research Articles

The Implication of Political Risk and Specific Macroeconomic Variables on Total Revenue in Tourism Industry

Political risk is one factor that influences tourism performance as a tourist is more sensitive to the hosting country’s political environment. In addition, to the effect of country risk on the tourism industry, the global economy has recently experienced severe shocks due to high inflation rates, political risk, and currency volatility. This paper aims to investigate the implications of political risk, inflation, and exchange rate volatilities on tourism revenue in South Africa. A sample of 144 monthly data was used to assess both long-run and short-run relationships amongst the study variables using the ARDL cointegration and error correction model approaches to achieve the study objective. Results indicated that political risk, inflation rate, and exchange rate volatility influence long-term revenue changes in the tourism industry. In contrast, real effective exchange rates and inflation significantly impact total revenue in the tourism sector. The findings also indicated that political risk has no short-term effect on tourism revenue. Based on these findings, the study recommends that the country's political stability increase, increasing the number of tourist arrivals and resulting in growing revenue for the tourism industry in S.A. Additionally, the South African reserve bank should revise its exchange-rate pegging, monetary targeting, and inflation targeting to reduce the effects of inflation on tourism revenue.

Output-inflation trade-offs and the optimal inflation rate

We show that a positive superelasticity of demand, often referred to as “Marshall's Second Law of Demand,” is a new push factor of optimal inflation in staggered price models. The positive superelasticity alters the trade-offs between output and inflation in the models. It allows higher trend inflation to steepen the slope of a model-based Phillips curve and lower the steady-state average markup, and thus reduces the inflation-related weight in a model-based welfare function for higher trend inflation and the steady-state welfare cost of higher trend inflation. Consequently, the positive superelasticity can make the optimal trend inflation rate positive and lessen the welfare difference between inflation targets of 2 percent and 4 percent.

Central bank objectives, monetary policy rules, and limited information

Since the Global Financial Crisis, a lively debate has emerged regarding the monetary policy rule the central bank of a small open economy (SOE) follows and should follow. By identifying the monetary policy rule that best fits historical data and minimizes central bank loss functions, this study contributes to this debate. We estimate a medium-scale micro-founded SOE model under various monetary policy rules using Israeli data from 1994 to 2019. Our results indicate that the model achieves a better fit to historical data when assuming inflation targeting (IT) compared to nominal income targeting (NGDP). Given central bank goals, shock uncertainty, and limited information, NGDP targeting rules may have been more desirable over the last three decades than IT rules.

The contradictions of unconventional monetary policy as a post-2008 thwarting mechanism: financial dominance, shadow banking, and inequality

The global financial crisis (GFC) of 2008 has triggered profound changes in the macro-financial regulatory architecture. Ever since, the interplay between political, institutional, and macroeconomic developments has received increasing attention in political economy, as in the evolutionary macro-financial approach of institutional super-cycles with its concept of thwarting mechanisms. While these institutional structures aim to stabilise the macro-financial system, they may also contradict each other due to unintended side effects. This paper argues that the understanding of thwarting mechanisms can be enriched by further integrating it with political economy literature on finance within the post-GFC institutional setup. It conceptualises unconventional monetary policy as a novel thwarting mechanism and analyses the contradictory implications for overall macro-financial stability with a particular focus on aggregate demand. It suggests three reasons why this thwarting mechanism failed to restore sustained economic growth in the post-crisis decade: First, sustained large-scale asset purchases perpetuate the structural drivers of financial dominance in political power relations, entrenching the role of the shadow banking system within the macro-financial order and impairing the development of other thwarting mechanisms. Second, unconventional monetary policy maintains the tenets of the inflation targeting regime and thereby sustains neoliberal macroeconomic governance with restrained fiscal policy. Third, it exacerbates preexisting wealth and income inequality by redistributing wealth towards asset owners, undermines consumer demand, and thus contributes to stagnation tendencies. Thus, this paper suggests that the contradictions of this novel post-GFC thwarting mechanism contribute to weaken economic growth and thus fail to restore macro-financial stability.

Tale About Inflation Tails

We study probabilities of extreme inflation events in the Unites States and the euro area. Using a state-space model that incorporates information from a large set of professional forecasters, we generate the term structure of inflation forecasts as well as probabilities of future inflation for any range of inflation outcomes in closed form at any horizon. Since the onset of the COVID-19 pandemic, inflation expectations increased materially amid heightened uncertainty about future inflation. Likelihood of significant departures of inflation targets in the longer term reached about 15 percent in the middle of 2022, increasing from near zero levels in 2020. Such an increase in the right tail of the probability distribution over future inflation outcomes drives an increase in inflation expectations and inflation risk premiums. Several popular external uncertainty measures are associated with variation in tail probabilities.

Households' Preferences Over Inflation and Monetary Policy Tradeoffs

We document novel facts about U.S. household preferences over inflation and monetary policy. Many households are highly attentive to news about monetary policy and to interest rates. The median household perceives the Federal Reserve's inflation target to be three percent, but would prefer it to be lower. Quantifying the tradeoff between inflation and unemployment, we find an average acceptable sacrifice ratio of 0.6, implying that households are likely to find disinflation costly. Average preferences are well represented by a non-linear loss function with near equal weights on inflation and unemployment. These preferences also exhibit sizable demographic heterogeneity.

Exploring Inflation Dynamics with the Phillips Curve in Türkiye: Evidence from the Markov Regime Switching Model

Unlike in many advanced and emerging market economies, inflation was already a problem for the Turkish economy before the COVID-19 pandemic. During the 1990s, Türkiye experienced severe inflation, which reached three digits in some months. Although inflation was reduced to single digits in the 2000s through a successful disinflation program under an implicit inflation targeting framework with a flexible exchange rate regime, price stability became a problem again after the global financial crisis. Inflation gradually increased during the 2010s and became out of control after late 2021. This study aims to explore inflation dynamics in Türkiye using the Phillips curve framework for different inflation environments. To this end, the Phillips curve equation, augmented with the exchange rate and oil prices, is estimated using the Markov regime switching model between January 2006 and September 2023. Two regimes are identified in the sample, namely low- and high-inflation regimes. According to the estimation results, the Phillips curve is invalid in both regimes. The unemployment gap is statistically insignificant despite its negative impact on current inflation. The increasing coefficient of backward inflation in the high regime reflects the resurgent indexation behavior, which was dominant before inflation targeting was introduced in Türkiye. The positive impact of oil prices is only statistically significant in the low regime. While an increase in the exchange rate significantly raises inflation in both regimes, the effect is greater in the high-inflation regime. These empirical findings indicate that the primary issues for controlling inflation in Türkiye are inflation inertia and exchange rate stability.

Examining Inflation Expectations within Asian Economies: Application of Wavelet Quantile Analysis towards Assessing Monetary Policy Credibility

The relevance of rational expectations has generated a renewed interest in assessing the accuracy of monetary policy declarations. Despite the enduring principles of the rational expectations theory, a remarkably dependable central bank can alleviate inflation by skillfully managing inflation expectations, thus avoiding adverse effects on employment. This paper explores the complex relationship between inflation expectations, target inflation rates, and the credibility of monetary policy, emphasizing the importance of rule compliance and transparent communication for establishing public confidence in central banks. While the estimation processes the study utilizes wavelet-based quantile regression by investigating data from 1990q1 to 2021q4, with variations across selected countries. The credibility index (CI) is employed to instrument the dependability of monetary policies. Nevertheless, the results of this study indicate that Policy credibility has a significant impact on inflation expectations in Bangladesh and Sri Lanka, underscoring the importance of clear communication and institutional reforms. Different outcomes in India and considerable effects in Pakistan underscore the necessity of customized policy measures and communication strategies to address inflation and promote economic stability in South Asia.

Re-Estimating Inflation Threshold Level for Tanzania

The study seeks to estimate the relationship between inflation and economic growth, as well as the headline inflation threshold level beyond or below which Tanzania’s economic growth is constrained. This was achieved through the Ordinary Least Squares (OLS) regressions employing quarterly data spanning the period 2001:1 to 2021:4. The findings suggest that the coefficient of inflation variable that captures the effect of low inflation on growth is statistically significant and positive, implying that low inflation is pro-growth. One percent increase in inflation leads to an economic growth of 0.352 percent. Furthermore, the coefficient of the high inflation proxy variable has a negative sign with the inflation threshold level being seven percent. At this level, the total effect of inflation on growth is estimated at 0.3494 percent. Moreover, optimal inflation levels of one to three percent have no impact on growth, as mirrored by invariable adjusted R2.The recommendations from the results of this study are three-fold. First, the Bank of Tanzania may consider inflation targets below seven percent but above three percent in the monetary policy planning to continue supporting economic growth. Second, since the Bank has largely depended on inflation behaviour in informing inflation targets to choose, which ended into picking targets far from the optimal inflation, it is essential that the Bank also benefits from empirically estimated threshold rates. Third, in order to utilize any new information emanating from structural changes and developments in the economy, inflation threshold level should be re-estimated regularly.

Impact of sub-national synchronization on the behavior of national business cycles in emerging economies with inflation targeting

PurposeThe purpose of this paper is to assess sub-national business cycle (BC) synchronization's impact on national cycles in four emerging markets economies with inflation targeting (IT-EMEs): Brazil, Colombia, South Korea and Mexico.Design/methodology/approachThe authors use panel data models with fixed-effects and distributed lags.FindingsThe authors disclosed that sub-national synchronization increased national cycle amplitudes during expansion and recession phases. The authors also noticed that South Korea exhibited a more pronounced effect compared to Latin American countries, and this seemed to be associated with differences in the homogeneity of the production structures in the regions of these countries.Research limitations/implicationsThe authors cautioned that contrasting the findings with prior research on the effects of regional BC synchronization in IT-EMEs or with studies in different geographical contexts, is not possible due to the absence of prior research endeavors with this specific focus.Originality/valueThis study constitutes a first attempt to explain the impact of subnational cycle synchronization on the magnitude of national cycles in four IT-EMEs.

Inflation Targeting in South Africa

South Africa had formally introduced a policy of inflation targeting (IT) in February 2000. By December 2001, the governor of the South African Reserve Bank, after reading the latest statistics, was concerned with the disappointing economic data. Economic activity had slowed drastically, to the point that the country appeared to be heading for a recession. The gloomy statistics forced the governor to consider whether the country had pursued the right policy. Persistently high unemployment, one legacy of the apartheid era, meant that South Africa did not have the luxury of waiting for new policies to bear fruit. With the inflation forecast to exceed the mandated target, the governor would have to tighten monetary policy, which would further restrict investment. Was it is time for South Africa to change course?

Regulatory Capital Requirements, Inflation Targeting, and Equilibrium Determinacy

Regulatory Capital Requirements, Inflation Targeting, and Equilibrium Determinacy

Inflation targeting and firm performance in developing countries

Using a panel of 31,027 firms in 47 developing countries over the period 2006-2020, this paper looks at the effects of inflation targeting on firm performance. Estimations performed using entropy balancing to address endogeneity in policy adoption reveal that inflation targeting significantly increases firm performance, mainly measured by sales growth and productivity growth. This effect is robust to a wide range of tests (including alternative models, measures, and samples), and may vary under different macroeconomic and firms' structural characteristics. Lastly, by looking at possible transmission channels, we reveal that these favorable effects seem related with the capacity of the inflation targeting framework to reduce macroeconomic instability.

State-dependent oil price shocks on inflation and the efficacy of inflation targeting regime

This paper investigates the state-dependent effect of oil price shocks on domestic inflation using a panel of 30 countries over the period of 2001Q3 to 2022Q4. We find a significant asymmetric effect over different economic states, with a positive and significant effect during economic boom periods, while no significant effect during bust periods. Such state-dependent effect is also quantitatively verified through a dynamic panel threshold framework. As a related question, the paper also examines the effectiveness of inflation targeting (IT) regime in adjusting the oil price shocks-induced inflation. We evaluate the effectiveness of IT regime from several dimensions: whether it contributes to reducing 1) the level of inflation induced by oil price shocks during boom periods, 2) the probability of oil price shocks-induced inflation deviating from inflation target range, and 3) the duration of inflation deviations from the target range. Our findings indicate that central banks under inflation target regime do not mitigate the level and volatility of inflation induced by oil price shocks more effective than the Non-IT regime. Nevertheless, it reduces the duration of oil price shocks-induced inflation that is above the upper limit of target range. As for the causes, our findings suggest that inflation-targeting central banks do not react aggressively to oil price shocks during economic expansions so as to maintain the positive momentum of economic growth and employment, rather than immediately curbing inflation.

Assessing the predictability of the Bank of Russia decisions on the key rate and informational advantage in its forecasting

The communication policy of central banks plays a significant role in setting the expectations of economic agents. If key rate decisions are inconsistent with market expectations, managing expectations and anchoring inflation expectations may be difficult. We assess the predictability of the Bank of Russia’s key rate decisions over the 2021—2023 period in two ways: using media surveys of analysts and shifts in the Russian government bond index and the daily volatility of its yield. The results show a significant impact of unexpected key rate decisions on Russian government bond prices and daily volatility. Then, using statistical metrics computed from macroeconomic survey data and another linear and piecewise linear model, we find the informational advantage of the Bank of Russia in predicting the key rate. The decisions unexpected for the market are explained by the information advantage of the Bank of Russia, as well as the realization of geopolitical and inflation risks in the period under study. Thus, we conclude that there is a need to improve the quality of communication regarding future decisions. As the communication policy develops, the predictability of the Bank of Russia’s decisions on the key rate will increase. In turn, economic agents and market participants will adapt to the expected decisions in advance, which will accelerate the achievement of the inflation target and the adjustment of inflation expectations.

Analisis Kebijakan Moneter melalui Jalur Harga Aset di Negara Muslim Berkembang

This research aims to analyze the contribution of variables from the interaction of monetary policy transmission variables (SBI, STOCK, INVESTMENT, GDP, INFLATION). This research uses secondary data or time series, namely from the first quarter of 2011 to the first quarter of 2016. The data analysis model in this research is Vector Autoregression (VAR) model and sharpened with Impulse Response Function (IRF) and Forecast Error Variance Decomposition (FEVD) analysis. The results of the VAR analysis show that the past variable (t-1) contributes to the current variable both the variable itself and other variables and from the estimation results it turns out that there is a reciprocal relationship between the variables where all the variables are monetary policy transmission variables (SBI, STOCK, INVESTMENT, GDP, INFLATION) contribute to each other. The results of the IRF analysis show that the stability of the response of all variables is formed in period 5 or the medium and long term, where the response of other variables to changes in one variable shows different variations from positive to negative responses or vice versa, and there are variables whose responses remain positive or remains negative from the short term to the long term. The results of the FEVD analysis show that there are variables that have the largest contribution to the variable itself in the short, medium and long term, such as GDP and SB. Meanwhile, other variables that have the greatest influence on the variable itself in the short, medium and long term are GDP which is most influenced by INVESTMENT, Inflation is most influenced by GDP, INVESTMENT is most influenced by Inflation, SB is most influenced by INVESTMENT while it is most influenced by SB. The results of the analysis of the interaction of each monetary policy transmission variable in the path of asset prices in developing Muslim countries in the short, medium and long term show that monetary policy transmission can increase economic growth and achieve the inflation targets of developing Muslim countries.

Comment on “Flexible Inflation Targeting and Macroeconomic Performance: Evidence from ASEAN”

Comment on “Flexible Inflation Targeting and Macroeconomic Performance: Evidence from <scp>ASEAN</scp>”

STUDYING THE RELATIONSHIP BETWEEN THE PRICE OF GOLD AND THE INFLATION RATE PERSISTENCE IN ALGERIA USING THE FRACTIONAL INTEGRATION MODEL

This study aims to analyse the relationship between gold price and inflation rates in Algeria to determine the extent of inflation persistence in face to gold price shocks from January1992 to March 2023 using the recently developed Fractional Cointegration Model, which allows residuals to be fractionally integrated rather than stationary, with the classical cointegration approach based on I(0) stationarity or I(1) cointegrating relationships. This topic was chosen due to its significance for monetary policymakers, investors, financial analysts and academics in understanding the dynamics of inflation persistence in Algeria and studying the impact of some prices shocks on it, such as gold price shocks, These shocks were affected by several factors, the most important of which is the Ukrainian war, which contributed to the rise of gold price to record levels. Our results also showed that Algeria has a co-integration relationship between gold price and the inflation rate, with an estimated persistence of 0.593, which is greater than 0.5 and less than 1. This indicates that the impact of gold price shocks is still present for a long time on the inflation rate persistence in Algeria, in other words the inflation rate in Algeria will persistence for a longer period due to the shock of gold price before eventually fading away, and with the adoption of a monetary policy targeting inflation in Algeria, it will contribute to reducing the inflation rates persistence.

THE IMPACT OF INFLATION TARGETING ON ENSURING ECONOMIC STABILITY

The article provides an analysis of the dynamics of changes in the monetary policy of modern Ukraine. The importance of inflation targeting in the history of Ukraine is global and significant. At this stage, Ukraine uses a managed exchange rate flexibility regime, which is a direct descendant of the exchange rate targeting regime, but this solution is only temporary. In the future, it is the regime built on inflation that will play a key role in the development of a prosperous Ukraine, being the main policy of the National Bank of Ukraine, but the significance of this process is somewhat lost against the background of the country’s socio-economic transformations, which only emphasizes the significance of this analysis. The return to this regime must be gradual and with the rejection of the exchange rate fixation, even in a flexible form, which seems impossible today. Despite this, such a refusal is part of the central bank’s strategy, so it is extremely important to focus attention and analyze such a transition.

Inflation targeting regime in the Russian economy

Subject. This article discusses the issues related to the inflation targeting regime in the Russian economy. Objectives. The article aims to assess the impact of the inflation targeting regime on the Russian economy. Methods. For the study, I used analysis and synthesis, special economic and mathematical methods, correlation and regression analysis, and the graphical method. Results. The article covers the impact of the inflation targeting regime on the Russian economy in the context of numerous aspects and positions. It reveals that the inflation targeting regime for the Russian economy causes the depreciation of ruble liabilities, increasing the requirements for guarantees of their high profitability. Conclusions. The impact of the inflation targeting regime on the Russian economy, which is ultimately expressed in the depreciation of ruble liabilities and the devaluation of the ruble, in the context of a decrease in the gold content of the average monthly nominal accrued wages of employees in a full range of organizations, informs the authorities about the possibilities of stimulating the growth and development of the Russian economy.