Inflation Targeting Monetary Policy Framework Research Articles

Hawkish shift in Ghana’s central bank’s monetary policy reaction function: a fiscal connection

ABSTRACT This study examines Ghana’s central bank’s monetary policy under Ghana’s inflation-targeting (IT) monetary policy regime since 2002. We find that Ghana’s central bank pursued a passive monetary policy under the unofficial IT monetary policy regime and hence cannot explain the decline in Ghana’s inflation rate during this period. We also find that Ghana’s central bank switched its monetary policy from passive to active under the official IT monetary policy framework, and hence cannot also explain Ghana’s rising inflation rate observed during this period. We provide evidence suggesting that Ghana’s central bank’s policy change might have been influenced by fiscal factors.

Inflation-Targeting Monetary Policy Framework in Nigeria: The Success Factors

Inflation-Targeting Monetary Policy Framework in Nigeria: The Success Factors

Short-run dynamics and long-run effects of monetary policy on residential property prices in South Africa

PurposeThe study aims to estimate the short- and long-run effects of monetary policy on residential property prices in South Africa. Over the past decades, there has been a monetary policy shift, from targeting money supply and exchange rate to inflation. The shifts have affected residential property market dynamics.Design/methodology/approachThe Johansen cointegration approach was used to estimate the effects of changes in monetary policy proxies on residential property prices using quarterly data from 1980 to 2022.FindingsMortgage finance and economic growth have a significant positive long-run effect on residential property prices. The consumer price index, the inflation targeting framework, interest rates and exchange rates have a significant negative long-run effect on residential property prices. The Granger causality test has depicted that exchange rate significantly influences residential property prices in the short run, and interest rates, inflation targeting framework, gross domestic product, money supply consumer price index and exchange rate can quickly return to equilibrium when they are in disequilibrium.Originality/valueThere are limited arguments whether the inflation targeting monetary policy framework in South Africa has prevented residential property market boom and bust scenarios. The study has found that the implementation of inflation targeting framework has successfully reduced booms in residential property prices in South Africa.

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.

Impact of Inflation Targeting Policy Framework of Countries between the Period of 2009-2019

Today, many countries in the world tend to choose Inflation Targeting Monetary Policy Framework, in which context it has become a matter of debate whether inflation or economic growth is driven by monetary expansions. The common acceptance is that inflation is created by the continuous rise in the money supply which is strongly proved through the economic theories forwarded by Karl Marx, Irvin Fisher and Friedman. The main aim of the study is to examine the relationship between money supply and economic growth under a broad phenomenon by utilizing the countries with inflation targeting policies in action. The time-series data have been collected from different countries that exercise inflation targeting from 2009 to 2019 and the sample included 39 countries from all over the globe, both from developed and developing categories. The utilized Autoregressive Distribution Lag (ARDL) model forwarded the results suggesting that there is a significant negative relationship between the economic growth and money supply in the long run while no relationship has been observed in the short run.

The regulatory and policy variables influencing FDI in South Africa

This paper dealt with the regulatory and policy variables influencing Foreign Direct Investment (FDI) in South Africa. Since the advent of democracy 26 years ago, South Africa had its own share of benefits from democratic rule. This was the period of great success, and three free and fair elections were held without violence and intimidation. The South African government started using the “inflation targeting monetary policy framework” to have an environment where inflation will stabilise. Although in literature it is stated that many governments have adopted this policy in order to lure investors in through their attractive risk‐free returns in their investment portfolios. The paper used unobtrusive techniques to analyse secondary data. The South African investment climate remains faced with challenges, which curtail the full attainment of conditions conducive for quality FDI. When regulations are made less cumbersome, it becomes simpler for investment to flow into the country, and international and local entrepreneurs prosper as the ease of doing business improves. South Africa does not have a complex regulatory framework, but its challenges stem from a lack of regulatory transparency, which impeded investment. TISA the agency, which DTI created to reduce obstacles encountered in FDI offers foreign investors clarification on the regulatory and legal environment. Many countries have also cancelled their BITs with South Africa, including Ecuador, Bolivia, and Venezuela. South Africa's business environment and its investment climate are largely dependent on the events that occur in the political arena and the economic environment.

Exchange Rate Volatility and Its Implications on Macroeconomic Variables in East African Countries

The study examines the extent of exchange rate volatility and its impact on key macroeconomic variables such as exports, FDI inflows, interest rate and inflation in Tanzania, Kenya and Uganda. The GARCH model is used to compute the extent of exchange rate volatility while the Panel Autoregressive Distributed Lag (ARDL) technique or pooled mean group (PMG) estimator was used to estimate the effects of exchange rate volatility on selected macroeconomic variables. The results indicate that volatility in the exchange rate is a real issue in all the sampled countries and is fundamentally driven by exports and FDI dynamics for the period under consideration. The results indicate a positive impact of the exchange rate volatility to export performance and lending rates in the long run. Exchange rate volatility appears to be detrimental to both export performance and leads to a reduction in lending rates in the short run. Also, the response of FDI to exchange rate volatility seems to be negative in the long run while in the short run the response from the volatility of real exchange rate seems is insignificant. Though not significant, the volatility of the exchange rate appears to have a positive impact on inflation. The study recommends that policymakers need institute mitigation measures which could smooth out excessive exchange rate volatility to minimize its likely impact on the economy. The study also indicated a need for the EAC countries to consider adopting inflation targeting monetary policy framework in order to contain inflation at the appropriate level.

Inflation Dynamics in Nigeria

Inflation remains a central issue to policy makers and analysts. High inflation induces uncertainty, adversely affects financial sector development and it is the goal of monetary authorities to achieve price stability in consonance with the general consensus that price stability aids growth of the economy. Despite the goal of single-digit inflation rate by monetary authority (CBN), the Nigerian economy is still practically characterized by high cost of living, increased variability of relative prices of goods and services; therefore the reliability of the monetary aggregates as the main signal for the conduct of monetary policy for control of inflation has become increasingly questionable. Against this backdrop, this research examined the determinants of dynamics of inflation in Nigeria over a period of 36 years (1982-2016); using New Keynesian Philips Curve theoretical framework, Ordinary Least Square estimation techniques (OLS), ARDL bounds testing approach to cointegration and Vector Autoregressive (VAR) econometric techniques to ascertain if inflation is only a monetary phenomenon in Nigeria having inflation as dependent variable and exchange rate (Ex), interest rate (Ir), Unemployment (U), Real Gross Domestic Product (RGDP) as independent variable. The result of the estimation shows that inflation is not only a monetary phenomenon by the statistical significance of EX and RGDP at short and long-run, U and IR at long-run. Therefore, it was thus recommended that exchange rate and inflation targeting monetary policy framework that will revalue the naira should be implemented to reduce inflation while expansionary fiscal policy that will increase RGDP is also recommended for reduction of inflation.

Asymmetric impact of exchange rate changes on stock returns: evidence of two de facto regimes

PurposeThis study focuses on Egypt’s recent experience with exchange rate policies, examining the existence of spillover effects of exchange rate variations on stock prices across two different de facto regimes and whether these effects, if any, are asymmetric.Design/methodology/approachThe empirical analysis is carried out using a nonlinear autoregressive distributed lag modeling framework, which permits testing for the presence of short- and long-run asymmetries. Relevant local and global factors are also included in the analysis as control variables. The authors divide the entire sample into a soft peg period and a free float one.FindingsOver the soft peg regime period, both positive and negative changes in EGP/USD exchange rates seem to have a significant impact on stock returns, whether in the short or long run. Short-term asymmetric effects vanish in the free float period, while long-term asymmetries continue to exist. By and large, the authors find that currency depreciation tends to exercise a stronger influence on stock returns than does currency appreciation.Practical implicationsThe results offer important insights for investors, regulators and policymakers. With the domestic currency depreciation having a negative impact on stock prices, investors should contemplate implementing appropriate currency hedging strategies to abate depreciation risks and, hence, preserve their expected rate of return on the Egyptian pound-denominated investments. In the current post-flotation era, the government could pursue a flexible inflation targeting monetary policy framework, with a view to both lowering the soaring inflation toward an announced target rate and stabilizing economic growth. The Central Bank of Egypt (CBE) could adopt indirect monetary policy instruments to secure tightened liquidity conditions. Besides, the CBE could raise policy rates to incentivize people to keep their money in local currency-denominated instruments, instead of dollarizing their savings, thereby relieving banks of foreign currency demand pressures. Nevertheless, while being beneficial to the country’s real economy on several aspects, such contractionary monetary measures may temporarily impinge on stock market performance. Accordingly, policymakers should consider precautionary measures that reduce the potential for price distortions and unnecessary volatility in the stock market.Originality/valueTo the best of the authors’ knowledge, the current study represents the first attempt to explore the potential impact of exchange rate changes under different regimes on Egypt’s stock market, thus contributing to the relevant research in this area.

An Analysis of the Effectiveness of Inflation Targeting Monetary Policy Framework in South Africa

This study is premised on investigating the effectiveness of inflation targeting in South Africa. The methods of analysis include the Vector Autoregressive model (VAR), the unit root test and cointegration test. The analysis was conducted with the use of EViews version 9. The findings from the study revealed that the response of inflation is not consistent with the Taylor rule hence increases in the repo rate meant to reduce inflation actually increase the inflationary pressures in the economy. This is due to the composition of the Consumer Price Index. Housing constitutes the largest weight on the CPI hence this has an impact on how the Repo rate affects inflation. The autoregression model of inflation showed that the sum of the coefficients is less than one (0.965) showing that inflation targeting has effectively reduced the persistence of inflation in South Africa. Thus monetary framework in South Africa seems to be effective and should thus be advanced for wider economic benefit.

Inflation Targeting and Its Impact on Monetary Policy Post 2008 Crisis: A South African Insight

South Africa Inflation Rate declines to 7-Month Low of 4.5%. The annual inflation rate in South Africa fellto4.5percent in December of 2018, reaching the mid-point of the central bank’s target range of 3 percentto 6 percent, from 5.2 percent in theprevious month. It is the lowest annual inflation since May as cost of transport slowed sharply. The main task of microeconomic policy is the promotion of sustainable high economic growth, the creation of employment opportunities, the containment of inflation, improvement of the living conditions of all residents of a country, and the elimination of unjustifiable discrepancies in the distribution of income amongst our people. These economic objectives can best be obtained amongst other things in a stable financial environment. Financial instability is a major obstacle in the fulfilment of this task. Stable financial conditions should be maintained throughout the various phases of the business cycle to attain maximum economic development. In addition, inflation could only have an effect on the rate of unemployment if it could somehow affect the real wage in the economy. That is not impossible since the real wage is determined by the marginal productivity of labour in a competitive system. A number of countrieshave successfully adapted inflation targeting monetary policy framework in recent years. It is a framework based on hitting an inflation target, and it is considered that the target is going to be missed, then determining whether a change in policy stance is called for.In this paper, we briefly asses the viability of implementing an inflation targeting monetary policy framework in South Africa. The monetary policy in South Africa is conducted by the South African Revenue Bank. Those who have lived in South Africa in the past three decades witnessed dramatic uncontrollable price increase, convincing the Government to take serious measures pertaining to supply and demand of money. The paper furthermore, analyses the impact of inflation targeting on monetary policy in general, with a special focus on South Africa as developing country, highlighting the main strategic approaches implemented as well as the obstacles facing the developing countriesand South Africa in particular.

How Has Monetary Policy Framework Changes Affected the Model and Effect of the Money Demand Function in Thailand?

This paper investigates whether Thailand’s change to an inflation targeting monetary policy framework in 2000 changed the model and the effect of monetary policy by estimating a money demand function. It obtained fourth finding. First, the monetary policy framework change did not affect the appropriate money demand function model. Second, Adoption of an inflation targeting policy occurs structural change. Third, the effect of monetary policy changes with the adoption of an inflation targeting policy. Interest rate elasticity is positive before the framework change but negative after the framework change. Its value is weak, however. Fourth, the interest rate elasticity of the package (M2,r) is stable and predictive. This suggests that the national interest rate, rather than the exchange rate and foreign interest rates, is important to managing monetary policy. It also suggests that the same money demand function used in analyzing developed countries can be applied.

Macroeconomic Policies and Transmission Dynamics in India

Against the backdrop of the move to an inflation targeting monetary policy framework beginning 2014 with consumer price index (CPI) inflation as the nominal anchor, this paper revisits monetary transmission dynamics. Rather than confining to the typical three equation New Keynesian model, this paper assesses transmission in a broader, disaggregated model incorporating external sector, fiscal policy, banking sector and financial market variables to capture the interactions among key macroeconomic policies and macroeconomic aggregates. The empirical analysis confirms the role of monetary policy in containing demand and inflationary pressures. In view of the ongoing structural reforms, deregulation and opening up of the Indian economy, as well as ongoing initiatives in the monetary policy operating framework to improve the efficacy of monetary transmission, the transmission dynamics can be expected to evolve over time.

Efectos del traspaso inflacionario del tipo de cambio a la inflación: Canadá, Estados Unidos y México, 1990-2015

Analizamos el traspaso de los movimientos del tipo de cambio a la inflación (pass-through) para las economías del Tratado de Libre Comercio de América del Norte (TLCAN). En la estimación econométrica exploramos empíricamente las relaciones de causalidad entre la tasa de interés y el tipo de cambio de Canadá, Estados Unidos y México, así como el papel del tipo de cambio en el marco de política monetaria de metas de inflación (PMMI) de las tres economías. Nuestros resultados revelan que en Canadá y Estados Unidos de América el efecto de traspaso inflacionario es irrelevante, mientras que en México ha disminuido, aunque aún es significativo.

Is the wage rate the real anchor of the inflation targeting monetary policy framework?

Numerous central banks (cbs) focus on controlling the nominal interest rate (i) to sway the price level and meet the inflation target (πo) nowadays (Taylor, 1993; Bernanke et al., 1999; Woodford, 2003). The i is taken to be the anchor for a low and stable rate of inflation in an open economy model. Yet, some analysts, orthodox and heterodox alike, have challenged this belief arguing that cbs turn to the exchange rate (e) channel and adopt it as a second policy tool with the aim of meeting πo (Svensson, 1999; Hüfner, 2004). The purpose of this paper is to show that the veritable anchor of inflation is neither i nor e, but the wage rate and the unit labour costs (ulc). We conduct econometric analyses based on data from a set of inflation targeting countries. The main empirical findings support our hypothesis regarding the higher importance of wages and the ulcvis-à-vis i and e in the determination of the cpi.

THE PROSPECT OF INFLATION TARGETING IN KAZAKHSTAN

Over the last two decades, there has been a significant increase in the number of countries that began to pursue an Inflation Targeting monetary policy framework. Since the collapse of the Soviet Union, each of the fifteen newly created independent countries started to develop and run their own autonomous monetary policies. Kazakhstan announced the implementation of an Inflation Targeting policy in August 2015. At the same time, a number of researches show that Inflation Targeting might not work as well for developing countries as it does for developed ones due to certain fundamental differences and preconditions that must be met before the implementation phase. Thus, this paper discusses the case of Kazakhstan as a typical emerging market economy example, examines its ability to respond to various external shocks and identifies the main transmission channels in order to contribute to the knowledge in this particular area. Identification assumptions generate contemporaneous monetary shocks on domestic inflation behavior, which also take into account various features of the small open economy as well as indicate different important transitory and persistent effects. The results show, based on the interpretation of impulse response functions, a positive interest rate shock has an uncertain inflationary impact, which raises questions about the effectiveness of interest rate manipulation in keeping inflation within the given band. In addition, a positive exchange rate shock leads to a stronger upward pressure in inflation rates. Finally, inflation inertia explains a substantial increase in future inflation rates.

The Prospect of Inflation Targeting in Kazakhstan

Over the last two decades, there was a significant increase in the number of countries, which started to pursue an Inflation Targeting monetary policy framework. Since the collapse of the Soviet Union, each of fifteen newly created independent countries started to develop and run their own autonomous monetary policies. Having inherited not well-suited market monetary institutions, the collapse of the system led to the most severe economic downturn in those new states. Kazakhstan has announced about implementation of Inflation Targeting policy in August 2015. At the same time, number of researches show that Inflation Targeting might not work well for developing countries as it is for developed ones due to certain fundamental differences and preconditions that must be met before implementation phase. Thus, discussing the case of Kazakhstan as a classical emerging market economy example, examining its ability to respond on various external shocks and identifying main transmission channels would importantly contribute to the knowledge in this area. Identification assumptions for contemporaneous inflation behavior generates practical monetary policy shocks, which also take into account various features of the small open economy. The orthogonal policy shocks generated with the help of our SVAR model suggested us various monetary transitory effects on output and the price level. Accordingly, based on the interpretation of impulse response functions, positive interest rate shock has certain disinflationary impact, opposing existing opinion on weakness of interest rate manipulation to keep inflation within the given band. At the same time, positive exchange rate shock leads to more sensitive increase in inflation rates. In addition, inflation inertia does explain a substantial increase in future inflation rates. This is in compliance with traditional EMEs literature on monetary policy transmission channels mechanisms.

What's so Special about Inflation Targeting? A Comparative Analysis of Recent Canadian and US Monetary Policy Frameworks

In the early 1990s, Canada was one of several countries to adopt an inflation-targeting framework for monetary policy. A noted exception to this group was the United States, where the framework for monetary policy was, as it had been for some time, informed by a dual mandate to maintain both high employment and low and stable inflation. By the late 1990s, the United States seemed to settle, in effect, on an implicit inflation-targeting framework for monetary policy. Nevertheless, whether the preferences of each central bank actually shifted toward minimizing inflation variability, and whether the magnitudes, opportunity costs, and timing of any such shifts were the same for both economies are questions that remain largely unexplored. In this article, I estimate these preferences from 1970 to 2009. Taken together, my results indicate that the Bank of Canada was more inflation averse overall; and both central banks grew more inflation averse over time.

South African price changes and inflation since 1974: a note on the testing of inflation accuracy

As inflation credibility in South Africa records low readings when measured in terms of inflation credibility barometers, this note aims at assessing whether actual price movements provide any grounds for low inflation credibility. It compares the price movements of similar items with the rate of inflation over a period of 32 years, i.e. from 1974 to 2006, and discusses the use of an inflation accuracy indicator to compare estimated price levels adjusted by the rate of inflation and actual price levels. Over the period of comparison no systematic over- or underreporting of changes in prices in terms of the rate of inflation could be detected and the analysis suggests that little or no basis can be found to justify low inflation credibility. Inflation credibility is more likely than not influenced by the most recent purchasing experiences of consumers. Doubts concerning the accuracy of inflation figures could nevertheless result in the general public concluding that monetary policy aiming at the achievement of an inflation target brings only the pain of high interest rates without the tangible benefits of lower inflation, thereby jeopardising the usefulness of an inflation-targeting monetary policy framework.

The Movements and Fundamental Determinants of Real Interest Rates in South Africa

This paper analyzes the relationship between the real interest rate and its theoretical determinants. This study augments the Vector Autoregression (VAR) analysis with cointegration and error correction models to provide evidence for the short and long run behavior. The variables included in this model as potential determinants include changes in savings and changes in investment, nominal interest rate and the price level. Some results from this study justify the stance taken by the monetary authorities in South Africa of pursuing the Inflation Targeting Monetary Policy Framework