Inflation Targeting Monetary Policy Research Articles

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.

ARMA-Based Inflation Forecasting Under the Inflation Targeting Framework in Sri Lanka

Inflation targeting has been introduced as one of the monetary policy framework since the end of the 1990s. Forecasting inflation under the inflation-targeting monetary policy framework is also expected to improve with superior performance by constantly feeding updated information into the forecasting process, considering the domestic and global market conditions and developments. Literature evidence that inflation forecasting under inflation targeting is a challenging task with risk and uncertainty that are not easy to capture even in the latest modeling techniques. Inflation-targeting monetary policy was adopted by the Central Bank of Sri Lanka after the enactment of the Central Bank of Sri Lanka Act with effect from 15.09.2023. This study examines inflation forecasting under the inflation-targeting monetary policy in Sri Lanka implemented with a clear mandate assigned in the agreement for a flexible inflation targeting framework to guide the market and inflation expectations. Automatic ARIMA forecasting techniques are employed to forecast inflation using two series of price indices with different base years from 2016M01 to 2026M12, and 2022M01 to 2026 M12 including 30 months as forecasting length. According to the findings, inflation forecasting is in line with the 5 percent targeted level with a 3 percent margin to fluctuate for both sides subject to the upside and downside risk factors. Accordingly, Inflation forecasting is within the inflation projections indicated under the inflation fan chart. It further suggests that inflation has been gradually stable in SL compared to the recently elevated inflation experience. Therefore, inflation targeting and projections can be used to shape and guide market expectations to facilitate decision-making in forward looking policies toward achieving and maintaining domestic price stability, which is the primary objective of the Central Bank of Sri Lanka.

Trade Wars, Nominal Rigidities, and Monetary Policy

Abstract This paper shows that the outcome of trade wars for tariffs and welfare will be affected by the monetary policy regime. The key message is that trade policy interacts with monetary policy in a way that magnifies the welfare costs of discretionary monetary policy in an international setting. If countries follow monetary policies of flexible inflation targeting, trade wars are relatively mild, with low equilibrium tariffs and small welfare costs. Discretionary monetary policies imply much higher tariffs, high inflation rates, and substantially larger welfare costs. We quantify the effects of a global trade war among major economies using estimates of trade elasticities, economic size, net foreign assets, and trade openness. We find large welfare benefits of an inflation targeting monetary policy for all countries.

Wells or Welfare? Macroeconomic implications of the Canadian oil subsidy

The study constructs a general equilibrium model to investigate the macroeconomic effects of oil production and investment subsidies. To make the model reflect real-life situations, the study incorporates Canadian economic data and uses a Bayesian method to fine-tune the model. Although subsidies boost the short-term economic effects of oil price shocks, they lead to overall losses in economic welfare over time, regardless of the channel through which they are provided. The study shows that a less aggressive headline inflation-targeting monetary policy combined with an efficient tax system is more beneficial in terms of welfare maximisation. The findings suggest three essential and complementary policies: a gradual phase-out of oil subsidies, starting with investment subsidies due to their relatively high welfare cost; increased investment in the green energy sector to reduce carbon footprints and offset the decline in oil and gas sectors; and improved coordination between fiscal and monetary policies.

Asymmetries in the interest rate channel in inflation-targeting Latin American countries

This paper presents, first, a theoretical model that, by highlighting that commercial banks with market power are able to positively pass on to their clients variations in their costs and, furthermore, that the strength with which they can do so is in turn asymmetrically related to the elasticity of the demand for loans exhibited by those clients, explains the asymmetric empirical findings shortly described. Secondly, it empirically investigates the pass-through of monetary policy rates (MPR) changes into the consumer and commercial loans interest rates set by commercial banks in four Latin American countries with inflation targeting (IT) schemes, namely (in alphabetic order) Brazil, Chile, Colombia, and Peru, over a homogeneous period. To do so, it estimates Non-Linear Auto-Regressive Distributed Lag (NARDL) models for each country. Then, we find two types of important asymmetric responses in the interest rate channel of IT monetary policy. The first is that the long-run response of the consumer loans interest rates following increases in the MPR is greater than that of the commercial loans interest rates. The second is that, in general, when the demand is relatively more elastic (as in the case of commercial loans) then the banks interest rates tend to exhibit a greater response when the central bank lowers the MPR than when it raises it.

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.

Financial inclusion and monetary policy effectiveness in a monetary union: Heterogenous panel approach

AbstractWe examine the nexus between financial inclusion and inflation targeting monetary policy effectiveness in West African Economic and Monetary Union countries by employing a heterogenous panel approach that enables us to delineate the responses to policy innovations related to idiosyncratic country‐specific shocks, common shocks, and composite shocks. We find that these shocks significantly affect inflation and financial inclusion but with varying magnitudes, signs, time of responses, and persistence. We further demonstrate that inflation targeting monetary policy is differently associated with the various dimensions and indicators of financial inclusion. Overall financial inclusion shocks temporarily increase inflation; deposit shocks reduce inflation; and credit shocks increase inflation. Central bank policy rate differently responds across time horizon to overall financial inclusion shocks; and it increases due to credit shocks highlighting that the monetary authority responds to credit shocks by implementing contractionary monetary policy. Our results highlight that monetary policy aimed at promoting inclusive financial services and responses of monetary policy to financial inclusion should be specific to the dimensions of financial inclusion.

Однородность потребительской корзины и динамики инфляции в разрезе регионов

Introduction. Regional heterogeneity is among the factors that could define efficiency of central banks’ inflation targeting monetary policy. Purpose. The paper aims at assessing the impact of a commodity bundle structure of the RF constituents on regional inflationary processes by clustering based on regional consumer price indices and share of goods and services in the commodity bundle. Materials and Methods. The paper refers to k-means clustering. Results. The study shows that the commodity bundle structure affects inflation rate and volatility. A food share in the commodity bundle is the key distinguishing feature. The regions with a higher share of food in the commodity bundle are characterized with higher inflation volatility, while the regions with a higher share of services and non-foods in the commodity bundle reveal lower inflation volatility. The cluster with a high share of food in the commodity bundle is dominated by comparatively poor regions. The other cluster mostly consists of regions with million-plus cities. This indirectly confirms Engel’s law. It is worth noting that we could divide regions into two constant groups in 2016–2020, although in 2021 and 2023 we observed significant changes in the cluster centers determined by a change of a region’s consumption model. If a food share in region’s population spending declines and a spending share of such items as cars, travelling, and leisure goes up, then inflation volatility decreases. Conclusion. The shift from one cluster to another presupposes that population of the region should decrease their food expenditures and increase the consumption of goods and services which satisfy high-level needs. This is likely to reduce inflation volatility in Russia on the whole.

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.

Macro welfare effects of flexible labor contracts

We develop a Dynamic-Stochastic-General-Equilibrium model to study the macro welfare effects of flexible labor contracts. Capturing the empirical properties observed in the data, we incorporate two labor sectors in our DSGE framework: a fixed sector and a flexible sector. The fixed sector offers contracts that exhibit rigidities in working-hours and wages while the flexible sector offers flexible contracts in both dimensions. We calibrate the model utilizing Eurozone data and show that in the benchmark currency union economy, welfare would monotonically increase if fixed sector’s wage rigidity goes up, while welfare would monotonically decline in wage rigidity if the benchmark economy were to switch to inflation targeting. We also show that it is the working-hour flexibility of flexible labor contracts that reinforces the desirability of wage stickiness in the fixed sector. Finally, we obtain strikingly different optimal flexible sector sizes for economies in currency union and inflation targeting monetary policy regimes: while the optimal flexible sector size for a currency union economy turns out to be 0%, the optimal flexible sector size for an economy with inflation targeting is 100%. These important results prevail because large fluctuations in consumption associated with flexible labor arrangements are too costly for households in a currency union with limited monetary policy flexibility — outweighing the production flexibility gains from flexible labor contracts. In this respect, our paper formalizes the welfare concerns related to the growing flexible labor sector sizes in Eurozone and urge policy makers to pay special attention to regulations that induce more flexible labor arrangements in this region.

Economic Growth Implications of Inflation Targeting and Inflation Volatility: An Emerging Economy’s Perspective

Purpose: The purpose of this study was to comparatively examine the extent to which inflation targeting and inflation volatility impact on economic growth from an emerging economy’s perspective.
 Methodology: Annual data from the World Development Indicator (WDI) and the Bank of Ghana (BoG) from 1985 to 2014 were used for the study. The data was interpolated into quarterly series using E-views. The stationarity characteristics of the variables were tested using the Augmented Dickey-Fuller and the Phillip-Perron unit root tests. The GARCH (1 1) and ARDL models were employed for the analysis.
 Findings: The study found that inflation targeting had a positive significant effect on economic growth in Ghana. Also, despite the volatile nature of inflation in Ghana, inflation volatility had no significant effect on economic growth.
 Implications: This scholarly work would aid policy makers in policy formulation pertaining to inflation targeting and inflation volatility on economic growth. It will also open up the circles of knowledge regarding inflation targeting monetary policy’s regime in empirical literature, institutions of higher learning and the understanding of the general public. The study recommends that the Bank of Ghana maintains its current monetary policy framework - Inflation Targeting, but should strengthen the preconditions and subsequent requirements of the monetary policy in order to maximize the gains to economic growth.

Fiscal policy, macroeconomic performance and industry structure in a small open economy

We analyse how fiscal policy affects both the macroeconomy and the industry structure, using a multi-sector macroeconomic model of the Norwegian economy with an inflation targeting monetary policy. Our simulations show that the magnitude of the government spending and labour tax cut multipliers, whether monetary policy is active or passive, is comparable to what is found in the literature. A novel finding from our simulations is that the industry structure is substantially affected by an expansionary fiscal policy, as value added in the non-traded goods sector increases at the expense of value added in the traded goods sector. Moreover, expansionary fiscal policy reduces the mark-ups in the traded goods sector, while the mark-ups are roughly unchanged in the non-traded goods sector. The contraction of activity in the traded goods sector increases when monetary tightening accompanies the fiscal stimulus. Hence, we find that such a policy mix is likely to produce significant de-industrialization in a small open economy with inflation targeting.

The Unique Adoption of Inflation Targeting Monetary Policy: Lessons from an Emerging Economy

Purpose: The purpose of this study was to examine the extent to which formal announcement of inflation targeting impacts on inflation and inflation volatility, from an emerging economy’s perspective.
 Methodology: Annual time series data from 1985 to 2014, which was sourced from the World Development Indicators (WDI) and the Bank of Ghana (BoG) was used. The data was interpolated into quarterly data using E-Views. The GARCH (1 1) and AR 2-Newey West Models were employed.
 Findings: The study found that the formal announcement of inflation targeting had a significant negative impact on inflation and its volatility. Thus, the study discovered that research works arguing that inflation targeting has no beneficial influence on inflation must take into account the type of economic structure at play, policy credibility, institutional efficiency, and the general public's responsiveness to institutional policies and information.
 Implications: This scholarly work would aid policy makers, academic institutions and the understanding of the general public in matters of inflation targeting. This paper concludes that the formal announcement of inflation targeting contributes greatly to stabilize both the inflation rate and inflation volatility, and that, countries that adopt a piloting-based adoption will not achieve the gains of the policy framework within the piloting period.

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.

Monetary policy channels, sectoral outputs and sustainable growth in the ECOWAS region: a rigorous analysis and implications for policy

PurposeThe market-based monetary policy framework has been favoured by Economic Community of West African States (ECOWAS) economies. Hence, this study aims to investigate the effect of monetary policy channels on the sectoral value added and sustainable economic growth in ECOWAS. Data from the World Bank and International Monetary Fund over 2013–2019 were sourced for thirteen member countries. ECOWAS is found to have very high inflation level, interest and exchange rates.Design/methodology/approachThe study adopted the Driscoll–Kraay fixed-effects ordinary least squares regression (OLS) estimator.FindingsThe findings revealed that while the effect of monetary policy channels on the agricultural sector value added is largely heterogenous and significantly in-elastic, the one on the industrial and services sectors are overwhelmingly homogeneous and negative, but insignificant for the services sector. Moreover, the effect of monetary policy channels on sustainable economic growth is also homogeneously asymmetric, with imminent stagflation, while the interactive effects of monetary policy channels are heterogeneous on sustainable economic growth and economic sectors. Therefore, an inflation targeting monetary policy stance is generally recommended with prioritised exchange rate stabilisation amid sufficient fiscal space.Originality/valueThis is amongst the first studies to investigate monetary policy channels, sectoral outputs and sustainable growth in the ECOWAS region with a rigorous analysis and found implications for policy.

On the Macroeconomic Conditions of West African Economies to External Uncertainty Shocks

This study provides a detailed investigation of the time–frequency and frequency-domain analysis of the interconnectedness of country-level macroeconomic variables. Hence, the wavelet techniques—vector wavelet and wavelet multiple—employed with TVP-VAR are utilised as a robustness check. The macroeconomic variables considered are consumer price index (CPI), real exchange rate (EXR) and nominal effective exchange rate (NEER) for four selected West African economies—Côte d’Ivoire, Gambia, Ghana and Nigeria. The findings of the study reveal that there are significant comovements between the macroeconomic dynamics in a time–frequency domain for the selected economies. From the wavelet multiple technique, the study finds three interesting outcomes. First, there are traces of high comovements between the macroeconomic conditions of some countries in the long term. In addition, NEER has a strong exposure to external shocks due to the presence of periodic swings such as inflation, which makes it largely susceptible to shocks. Second, a high integration of macroeconomic variables, in the long term is found. Third, Global Economic Policy Uncertainty (GEPU) lags in the long term within the interdependencies of CPI as well as NEER but not EXR. This suggests that the presence of inflation most likely exposes these economies to external shocks. However, when this happens, external shocks act as a follower to influence economic activities within this region. The study advocates that governments and policymakers should deploy efficient inflation-targeting monetary policies to enhance price stability and minimise the adverse impact of GEPU for future monetary convergence.

WITHDRAWN: Monetary policy channels, sectoral outputs and sustainable growth in ECOWAS region: A rigorous analysis and implications for policy

The market-based monetary policy framework has been favoured by ECOWAS economies. Hence this study investigated the effect of monetary policy channels on the sectoral value added and sustainable economic growth in ECOWAS. Data from World Bank and International Monetary Fund over 2013 – 2019 were sourced for thirteen member countries. ECOWAS is found to have very high inflation level, interest and exchange rates. Furthermore, using the Driscoll-Kraay fixed-effects OLS estimator, the findings revealed that while the effect of monetary policy channels on the agricultural sector value added is largely heterogenous and significantly inelastic, the one on the industrial and services sectors are overwhelmingly homogeneous and negative, but insignificant for the services sector. Moreover, the effect of monetary policy channels on sustainable economic growth is also homogeneously asymmetric, with imminent stagflation, while the interactive effects of monetary policy channels are heterogeneous on sustainable economic growth and economic sectors. Therefore, an inflation targeting monetary policy stance is generally recommended with prioritised exchange rate stabilisation amid sufficient fiscal space.

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.

Fractional cointegration between gold price and inflation rate: Implication for inflation rate persistence

In this study, we employ a recently developed Fractional Cointegrating Vector Autoregressive (FCVAR) model to analyze the relationship between gold price and inflation rate, to determine the responsiveness of inflation rate persistence of the selected countries to gold price shocks. Our analyses cover two decades; ranging from January 2001 to December 2019. We also account for country heterogeneity; specifically, due to variation in countries’ level of development, income level, and monetary policy framework. Our results suggest that the effect of gold price shock lingers for a long time on inflation rate persistence of developing countries, and for a short time on inflation rate persistence of developed countries. We also find that a higher level of income is associated with lower gold price – inflation rate cointegrating persistence, but the possibility of high-income countries having higher gold price – inflation rate cointegrating persistence than low-income countries cannot be dispelled. We also find that adoption of inflation targeting monetary policy reduces gold price – inflation rate cointegrating persistence and that gold price – inflation rate cointegrating persistence is higher under limited or intermediate floating exchange rate arrangement than under free-floating and currency peg arrangement.