Adoption Of Inflation Targeting Research Articles

How to improve the continuity of central bank governors after natural disasters

Central banks have increasingly integrated sustainability objectives into their mandates, opening the influence of environmental risks in the appointment of central banks' officials. This paper presents the significance of natural disasters on the probability of a central bank governor's removal from office. The panel data from 99 countries from 1970 to 2018 using the semiparametric Cox proportional-hazards model (CPHM) was used. Our empirical results show that natural disasters raise the possibility that a central bank governor is replaced. The magnitudes of these impacts are heterogeneous across natural-disaster types and are robust when economic and political factors are controlled and different model specifications are used. The adverse effects of natural calamities become pronounced when central banks do not adopt inflation targeting, have low financial stabilities, and do not set sustainability objectives. Our findings suggest important policy implications for the political appointments.

Inflation targeting and its spillover effects on financial stability in emerging market economies

In this paper, we study whether adoption of inflation targeting monetary policy framework has spillover effects on financial stability in emerging market economies. Working with data for 64 emerging market economies, we develop financial stability and sector specific stability indices and identify the effect using dynamic panel data models in difference-in-difference framework. We find significant positive spillover effects of inflation targeting adoption on banking system resilience and external capital inflows arising from improved transparency and accountability of the central banks. Based on the results, the paper recommends to emerging market economies which are currently under inflation targeting lite regime, to adopt full-fledged inflation targeting monetary policy.

Does inflation targeting increase income inequality?

We contribute to the growing empirical literature on the impact of monetary policy on income distribution by focusing on the impact of adopting an inflation targeting (IT) regime to guide monetary policy. We assess the impact employing a panel of 121 advanced and developing economies, including 27 IT adopters, during the period 1971–2015. Our results suggest that IT adoption has contributed to greater inequality of household income as measured by the Gini coefficient and to a reduced share of GDP going to labor compensation. The results are robust to alternative estimation methodologies and to variations in the sample with respect to countries and data frequency.

한국의 실질금리 기간구조와 실질 기간 프리미엄

This study estimates the real term structure and real term premium of Korea. To do this, we construct an analytical real term structure and real term premium from a macro-finance affine term structure models with two macro variables. The macro factors include industrial production growth rate and inflation rate from January 2001 to August 2021. Our estimation results are based on Bayesian MCMC algorithm. We show that the real yield is downward trend after financial crisis. Compared to the nominal yield, it also exhibits relatively high persistent, less fluctuation and more stable. On the other hand, the real term premium is similar to the nominal term premium, since the inflation risk premium hardly different from zero on average. This result seems to be due to the fact that Korea inflation has maintained stable after adopting inflation targeting as a monetary policy.

Reduced macroeconomic volatility after adoption of inflation targeting: Impulses or propagation?

This paper asks whether the notable decline in macroeconomic volatility after countries adopted inflation targeting can be attributed to a more stable structure (the propagation mechanism) or less volatile shocks (the impulses). Using quarterly data from a sample of advanced and emerging market economies, results show that the observed reduction in inflation variability may be attributed largely to a more stable structure while the decreased output volatility is driven solely by much calmer shocks. The result is robust to various specifications examined.

Government size, inflation targeting and business cycle volatility

In this paper I analyze how government size used as a proxy for fiscal stabilization policy and inflation targeting influence the amplitude of the business cycle and private consumption volatility in a sample of developing countries, for the period between 1990 and 2018. Taking into account the potential endogeneity of these variables, and controlling for the exogenous variation in trade openness, the analysis provides strong evidence that government size significantly reduces business cycle volatility while it exerts no significant impact on private consumption volatility. On the other hand, adopting inflation targeting significantly increases the amplitude of the volatility of real output growth, while significantly decreasing private consumption volatility. The implemented form of the inflation targeting regime does not introduce any significant changes in the obtained results. The findings seem to provide evidence that there is a potential for an improved coordination between fiscal and monetary policy actions in developing countries that have adopted inflation targeting.

What lowered inflation in India: monetary policy or commodity prices?

India has seen lower inflation by historical standards for the past 6 years. This has been attributed to the adoption of inflation targeting by the central bank, the Reserve Bank of India in 2016. In particular, it has been asserted that the lower inflation reflects the anchoring of expectations. We evaluate these claims. An econometric investigation indicates that there is no basis to the claim that inflation has been lowered due to the anchoring of expectations. On the other hand, we are able to account for the trajectory of inflation in India after 2016 in terms of an alternative explanation of inflation, namely the structuralist.

Can inflation targeting reduce price information asymmetry and alleviate corruptive behavior? Evidence from developing countries

This paper examines the role of inflation targeting as a price signaling mechanism reducing price information asymmetry and potentially reducing incentives for corruptive actions through its direct control on the inflation rate, thus simultaneously increasing institutional quality. The obtained evidence suggests that adopting inflation targeting lowers corruption in a sample of 61 developing countries for the period between 1990 and 2018. Countries that have adopted inflation targeting experience lower corruption levels, as measured by the corruption perceptions (CP) index, controlling for other relevant determinants of corruption identified in the empirical literature, such as inflation, level of income, income distribution, trade openness and the rule of law. This result is sensitive to the type of inflation targeting adopted. Soft (unofficial) inflation targeting has no significant effect on the corruption level, giving support to the claim that strong institutional commitment, accompanied by transparency and constant communication with regards to inflation targets by the central bank, provides an adequate price signaling mechanism. In addition, the analysis provides evidence that an efficient rule of law reduces corruption levels significantly, although its effects are rather modest to support the claims that it can solely lessen corruptive behavior in the sample of developing countries.

Inflation Targeting and Economic Growth in the Middle East and North Africa (MENA): empirical modeling using ARDL approach

This paper analyses the relationship between Inflation Targeting and economic growth in 20 countries in the Middle East and North Africa (MENA) countries region (Algeria, Saudi Arabia, Palestinian Authority, Bahrain, Djibouti, United Arab Emirates, Egypt, Iraq, Iran, Jordan, Kuwait, Lebanon, Libya, Morocco, Mauritania, Oman, Qatar, Syria, Tunisia, and Yemen), using an Autoregressive Distributed Lag (ARDL) model over the period 2000-2020. An autoregressive distributed lag (ARDL) model is an ordinary least square (OLS) based model which is applicable for both non-stationary time series as well as for times series with mixed order of integration. The results show that Inflation Targeting can have several functions. It is a monetary policy framework based on an appropriate institutional architecture. The adoption of inflation targeting is often subject to a change in laws or administrative arrangements relating to the Central Bank. Inflation targeting might support economic growth by lowering inflation and volatility. However, monetary policy alone cannot drive growth. Inflation targeting might support economic growth by lowering inflation and volatility. Moreover, the results of econometric tests lead to convergent conclusions and argue for the existence of unidirectional causal relationships between economic growth and economic policy indicators.

Transition in decision-making in the South African Reserve Bank: an area of interest to Vishnu Padayachee (1952–2021)

The SA Reserve Bank (SARB) was established in terms of the Currency and Banking Act of 1920 and opened its doors for business for the first time on June 30, 1921. The SARB had limited committee decision-making and a high degree of individual responsibility for many years after its establishment. This approach started changing in the 1980s. Currently the SARB is characterised by extensive management-by-committee. This includes monetary policy decisions; in this instance a change for the better. The current monetary policy decision-making structure results not only in improved transparency, but also a better understanding of the role of monetary policy and the impact of monetary policy decisions. The improved monetary policy decision-making structure was ushered in at the time of the adoption of inflation targeting as a monetary policy framework for South Africa and successfully focuses attention on this mandate of the SARB.

Central Bank Independence: A Pseudo de Facto Case of Reserve Bank of India

The trend of studies dealing with the correlation between central bank independence and inflation rose to prominence in the last twentieth century, 1980’s. These phenomena lead to development of certain empirical indices for measuring CBI across the countries. This study tries to evaluate the central bank independence in India using the index modelled on the lines of Jasmine Mona and Talla with minor modification regarding price stability objective. The study covers the time period from 1990–1991 till 2018–2019. The results found were that CBI has in India has more or less increased but improved significantly since the adoption of inflation targeting and formation of monetary policy committee post 2016.

Time‐varying trend models for forecasting inflation in Australia

AbstractWe investigate whether a class of trend models, which decompose a time series into an underlying trend and transitory component, with various error term structures can improve upon the forecast performance of commonly used time series models when forecasting consumer price index (CPI) inflation in Australia. The main result is that trend models tend to provide more accurate point and density forecasts at medium to long forecasting horizons compared with conventional autoregressive and Phillips curve models. The best medium‐term point forecasts come from a trend model with stochastic volatility in the transitory component and that with a moving average component, whereas long‐run point forecasts are better made by trend models with stochastic volatilities and a moving average component. In a full sample study, we also find that trend models can capture various dynamics in periods of significance to the Australian economy which conventional models cannot. This includes the dramatic reduction in inflation when the RBA adopted inflation targeting, a one‐off 10% Goods and Services Tax inflationary episode in 2000, and then gradually decline in inflation since 2014.

A nonlinear ARDL model of inflation dynamics in the Philippine economy

This study investigated whether global oil price changes, exchange rate, interest rate, and economic output exert symmetric or asymmetric pass-through effects on inflation in the Philippines. A Nonlinear Autoregressive Distributed Lag (NARDL) model was fitted to the observable data using quarterly observations from 1998 to 2019. Knowledge of these relationships is important in monetary policy setting in achieving targeted inflation; the Philippines adopted inflation targeting in 2002. The finding shows that world oil price shocks are still prominent and the most important determinants of inflation variations in the country. There is prima facie evidence on the short-run asymmetry of oil price changes to inflation. Exchange rate pass-through to inflation was very minimal in the short-run, and there is no long-run effect. Evidence that interest rate and demand shocks have a long-run asymmetric effect on inflation was found. These findings imply that monetary policy setting should account for the asymmetric effects of inflation determinants. Study results provide a deeper understanding of how positive and negative changes of inflation determinants affect actual inflation, which aids policymakers in achieving targeted inflation.

The effects of monetary policy in Russia: A factor-augmented VAR approach

Using factor-augmented vector autoregressive (FAVAR) models, this study examines the effects of the Central Bank of Russia’s (CBR) monetary policy on economic indicators. The sample includes 39 monthly macroeconomic series and covers the period 2004 through 2019. The analysis revealed counter-intuitive results, with consumer prices often responding positively to a contractionary monetary policy shock, and vice versa; this is related to the impossible trinity. The ruble exchange devaluation was accompanied by price increases through an import price pass-through, so the CBR chose exchange stability and free capital flows out of the impossible trinity, temporarily subordinating monetary policy independence. Such independence was limited, possibly due to Russia’s high dependence on energy exports and the link between energy prices and the exchange rate. The findings indicate no direct evidence of an effect of monetary policy tightening on the decrease in consumer prices; rather, the attenuation of ruble depreciation may have helped to stabilize prices, even after the CBR adopted inflation targeting.

The evolution of central bank communication as experienced by the South Africa Reserve Bank

ABSTRACT Communication has evolved into a cornerstone of central bank design and policy implementation. The South African Reserve Bank has been proactive in this regard as well – most notably with the adoption of inflation targeting in 2001. Using novel text-mining techniques, we evaluate the communication of the SARB, as presented via public speeches and monetary policy committee (MPC) statements, in the context of historical developments from 1994 to 2020. Our analysis focuses on the volume, complexity, scope, and sentiment of communication. We conclude that MPC statements are consistently and narrowly focused on the mandate, whereas speeches capture more detail about how the thinking of SARB policy makers evolves over time. In both cases, communication serves as a channel to reduce uncertainty and build credibility in the public domain.

Anchoring of inflation expectations in large emerging economies

We investigate through a time-varying trend inflation model the anchoring of the inflation process in the five largest emerging economies: Brazil, Russia, India, China and South Africa (also known as the BRICS countries) since 1990s. Our analysis is based on a non-centered unobserved components stochastic volatility model of inflation. We decompose inflation into a permanent stochastic trend and a transitory (inflation gap) component. Monetary policy frameworks such as inflation targeting are designed to mainly anchor inflation expectations. By analyzing time-varying volatility of trend shocks, we measure changes in the degree of anchoring of inflation expectations over time. We find that after adoption of inflation targeting, reduction in the volatility of trend shocks is observed for all these economies. For all the BRICS economies except China, we find that the trend estimates were significantly close to the inflation target announced by the respective central banks. Results from the bayesian model comparison, show that the inflation process in these economies is conclusively time-varying. Hence by adding stochastic volatility we find a better fit for the inflation process.

Does Inflation Targeting Really Promote Economic Growth?

ABSTRACT Inflation targeting, as a monetary-policy framework, is said to promote economic growth. Yet, when evaluating the macroeconomic performance of inflation-targeting regime, the existing literature only emphasizes the dynamics of inflation and the costs associated with taming inflation. There is hardly any assessment of the growth claim. To fill the gap and to measure the causal impact of inflation-targeting adoption on economic growth, we compare the dynamics of output growth and long-term unemployment between countries that have adopted inflation targeting and the non-adopting countries. Our findings seem to refute the growth claim, and paint a bleak picture of inflation targeting: when compared to the countries that did not adopt inflation targeting, there is a significant reduction in the average growth rate among the inflation-targeting adopters by over ½ percentage point. Additionally, long-term unemployment significantly rises among the inflation-targeting countries by over 1½ percentage points as compared to the non-adopters. These results are robust to both the exclusion of the outlier observations and to the sensitivity tests recommended for such analysis.

Do central banks respond to exchange rate movements? A Markov-switching structural investigation of commodity exporters and importers

We analyse whether central banks in small open commodity exporting and importing countries respond to exchange rate movements, taking into consideration that there may be structural changes in parameters and volatility. Using a Markov Switching Rational Expectations framework, we estimate the model for Australia, Canada, New Zealand, Norway, Sweden and the UK. We find that the size of policy responses, and the volatility of structural shocks, have not stayed constant over the estimation sample. Furthermore, monetary policy has responded strongly to the exchange rate for many commodity exporters, most notablyNorway. This has had a stabilizing effect on the exchange rate. In particular, although the terms of trade are highly volatile among commodity exporters, the exchange rate has about the same volatility across all importers and exporters in the recent period. • Analyse if central banks in commodity exporters and importers respond to the exchange rate, allowing for time-varying policy rule and shocks. • Find strong evidence that neither policy responses nor the volatility of structural shocks have remained constant. • Central banks in three commodity exporting countries, Canada, New Zealand and Norway, respond strongly to the exchange rate in periods. • For Norway, the central bank also responds strongly to the exchange rate after adopting inflation targeting. • Policy rules with a high response to the exchange rate exacerbate the effects of external shocks on the domestic variables in advanced economies.

Inflation targeting adoption and institutional quality: Evidence from developing countries

AbstractInstitutional quality is often emphasised as an engine of economic development in developing countries. However, most of the literature assumes that institutions are exogenous. In this paper, we adopt the opposite view, and study the way the design of the monetary regime, and specifically the adoption of an inflation targeting regime, can impact the quality of institutions. Using the propensity scores matching method, which allows controlling for self‐selection in policy adoption, along with a wide set of robustness checks, including GMM‐based estimations and controlling for unobserved heterogeneity, we find that the adoption of inflation targeting significantly improves the quality of institutions.

Inflation, inflation uncertainty and the economic growth nexus: An impact study of South Africa

Inflation and inflation uncertainty are instrumental in the determination of financial stability, and ultimately, economic growth. We investigated the impact of inflation and inflation uncertainty on growth in South Africa by applying the autoregressive distributed lag (ARDL) estimation techniques on quarterly data covering the period 1961Q1 to 2019Q4. Unlike previous studies on South Africa, we investigated the joint impact of inflation and inflation uncertainty in South Africa, and also, pioneered in comparing the impact of both variables on growth before, and after, inflation targeting. This provided an opportunity to assess the effectiveness of inflation targeting while also investigating any changes in the behavior of the variables. We found that inflation negatively harms growth in both the short and long run, while inflation uncertainty is a short-run phenomenon in South Africa with no bearing in the long run. To promote growth, policymakers should continue to pursue policies that ensure price stability.• The paper investigated the impact of inflation and inflation uncertainty on economic growth in South Africa covering the period 1961Q1 to 2019Q4.• Using the autoregressive distributed lag estimation techniques, the paper found that inflation harms economic growth in both the short- and long-run in South Africa while inflation uncertainty is a short-run phenomenon as it affects economic growth only in the short run,• Interestingly, after adoption of inflation targeting, inflation uncertainty lost it relevance as a factor determining economic growth in South Africa.