Inflation Targeting Period Research Articles

Uzun Dönemli Ortak Değişkenlik Çerçevesinde Fisher Hipotezi: İngiltere Örneği

This paper aims to present the long-run covariability between inflation and the interest rate of the United Kingdom by using a new method developed by Müller and Watson (2018) that eliminates the low-frequency problems. In this study, the validity of the Fisher hypothesis is investigated under structural break periods for the UK's economy. The analysis is carried out with monthly inflation and interest rate for six periods: Full sample (1920:1-2019:12), interwar years (1920:1-1939:8), fixed exchange rate (1952:1-1973:2), Post War II (1952:1-1992:9) and two different inflation targeting periods (1992:10-2008:8 and 1992:10-2019:12). The empirical finding suggests that the Fisher hypothesis holds for the United Kingdom in the long-run.

Monetary Reaction Function in Indonesia During Inflation Targeting Period

This study analyzes the monetary reaction function with shocks and the fear of floating phenomenon in the inflation targeting period in Indonesia. This study uses a new neoclassical synthesis approach. The unit root test result explains that all variables are stationary or I(0), and the long-run regression model is estimated. The results show that interest rates respond positively to future inflationary (counter-cyclical) in the log-run. The effect of triple shocks on interest rates in Indonesia is estimated using the Forward-Looking Model (FLM) and Error Correction Model (ECM). Using a predictive model performance (informal test), the best model in this study is FLM. In the short-run, only fluctuations in world oil prices significantly affect interest rates (counter-cyclical policy). Furthermore, BI's response to future inflation cannot be compared with BI's response to economic fluctuations, so this study has not been able to explain the significant effect of economic fluctuations on deposit interest rates. It means that the fear of the floating phenomenon cannot be explained in this study.

Fisher's hypothesis in time-frequency space: a premier using South Africa as a case study.

Fisher hypothesis is universally accepted as an integral portion of monetary theory and practice, and yet the empirical evidence confirming a full Fisher effect remains scarce and the relationship has been challenged on several theoretical grounds referred to as ‘puzzles’. Our paper suggests the use of continuous wavelet transforms as a unified analytical framework for confronting the different Fisher puzzles in a harmonious way. Taking South Africa as a case study, we focus on the inflation targeting period of 2002:01–2021:02 and use signal-image conversion tools such as wavelet power spectrum, wavelet coherence spectrum and phase-difference dynamics to extract signal features of nominal interest rates and inflation expectations and further explore their dynamic synchronization across a time–frequency plane/domain. Three unique findings emerge from our study. Firstly, across a time domain a full Fisher effect only holds in the pre-financial crisis period. Secondly, across the frequency spectrums, higher frequency oscillations gradually lose relevance to lower frequency oscillations providing evidence of volatility transfer in the Fisher effect. Lastly, the phase-dynamics indicate a consistent positive synchronization throughout the sample period which is line with the traditional Fisher effect. Overall, these findings highlight the success of the South African Reserve Bank in using inflation targeting to steer the expectations of economic agents under the tenures of the last three governors and provide important lessons for other Central banks.

MONETARY POLICY SHOCK ON INFLATION, OUTPUT, AND EXCHANGE RATE

This study aims to estimate the impact of monetary policy shocks on inflation, output, and exchange rates during the inflation-targeting period. The data analyzed are quarterly data covering the period 2005Q3 - 2020Q1. The analysis tool used is the Vector Error Correction model with the cointegration relationships between variables. The results show that there are variations in the impact of the monetary policy shock on the response of the variables in the model. Monetary policy shocks can explain the forecast error variance of policy interest rates, inflation, exchange rates, and output, respectively, with the largest to the smallest contribution. The characteristics of shocks are unexpected and unpredictable, resulting in variability and volatility of the variable responses. Therefore, reducing the impact of the monetary policy shock can improve the effectiveness of the monetary policy. Improving the effectiveness of monetary policy can be done with the support of the central bank's credibility.

Exchange rate changes on export volumes in South Africa under the inflation targeting period.

This paper examines the long run effects of the exchange rate changes on export volumes in South Africa under the inflation targeting period using the Johansen cointegration and the Engle–Granger approaches. This paper further examines whether the 2007 global financial crisis, rising government debt, and cost of credit post 2008Q4 impacted the magnitudes of determinants of export volumes. Both tests confirm a long run relationship amongst export volumes, exchange rate, and foreign income. The long run exchange rate impacts are bigger than the short run effects. Foreign income demand has bigger impact on export volumes than the exchange rate. Evidence shows that 2007 global financial crisis reduced the impact of the exchange rate depreciation on export volumes but increased the impact of the foreign income demand. This suggests relying on the exchange rate as a policy tool alone to achieve the external adjustment may not raise export volumes. The global financial crisis exacerbated the adverse effects of the exchange rate volatility on the export volumes, indicating that policymakers should implement policies that limit the exchange rate volatility. The adverse effects of the global financial crisis on export volumes were transmitted more via the consumer prices rather than the exchange rate, suggesting that South Africa lost its price competitiveness during the crisis period. Rising government debt and the cost of credit post 2008Q4 are transmitted more via the exchange rate than relative price ratios to reduce export volumes. The exchange rate volatility channel does not transmit the rising government debt shocks to export volumes.Supplementary InformationThe online version contains supplementary material available at 10.1007/s43546-022-00217-2.

Pricing Process in Mexico: New Evidence on the Inflation Dynamics

We analyze the inflation dynamics in Mexico during inflation targeting period by a GMM estimate of the Hybrid New Keynesian Phillips Curve in its open and closed economy versions. We update and discuss previous results and expand the capacity of this tool to analyze inflationary dynamics by incorporating the exchange rate on labor costs. We find: a) robust evidence of adaptive and rational expectations; b) incorporating the exchange rate improves the inflation fit; c) this version of the Phillips Curve has strengthened since Great Recession, and e) expectations formation process changes during inflationary episodes according to the origin of shocks.

Interest Rates: The Cause or The Result? A Chicken and Egg Problem Revisited (The Relationship between Interest Rates and Inflation in Turkey)

This paper investigates the validity of Fisher’s hypothesis and neo-Fisherian approach for Turkey using cointegration of Pesaran et al. (2001) as well as the methodology of Granger causality developed by Toda and Yamamoto (1995). The scope of the study focuses on flexible inflation targeting period in Turkey. Inflation uncertainty is estimated by employing the GARCH model for the period 2010:M10-2020:M5. Empirical results indicate that there is a positive and significant relationship between nominal interest rates, expected inflation and inflation uncertainty in the long run. The results of Toda and Yamamoto causality suggests that inflation ucertainty and expected inflation effects nominal interest rates. Also inflation is affected by nominal interest rates. The empirical results indicating two way causality provides significant empirical evidence for the presence of the Neo- Fisher effect in addition to the Fisher’s hypothesis during the flexible inflation targeting period analyzed in Turkey.

Policy responses to shocks and monetary effectiveness under inflation targeting: The Philippine case

This article examines how monetary policy responses to economic shocks and monetary policy effectiveness have changed in the Philippines since inflation targeting was implemented in 2002. The study makes use of a structural vector autoregression to estimate financial and monetary policy shocks, among other shocks, based on an identification strategy similar to Gilchrist and Zakrajsek [2012] and Bassetto et al. [2016]. A Philippine financial conditions index (FCI) purged of monetary influences then decomposed according to instrument or market is used to aid estimation and analysis. Results of the recursive vector autoregressions (VAR) comparing pre-inflation-targeting and inflation-targeting periods reveal stronger and more systematic policy responses to non-financial demand shocks, partial and transitory accommodation of supply shocks, and greater exchange rate flexibility initially under the new monetary policy regime. There is, however, an observed weakening of monetary policy responses to financial disturbances and monetary policy transmission to growth likely related to episodes of strong capital inflows.

Monetary policy transmission in the United Kingdom: A high frequency identification approach

This paper investigates the impact of monetary policy shocks on macroeconomic and financial variables in the United Kingdom using a new series of high-frequency monetary policy surprises. Employing our surprises as an instrument in a monthly SVAR over the UK’s inflation-targeting period, we show that a monetary policy tightening induces a decline in economic activity and in CPI, an appreciation of the Pound, a reduction in bank credit, and a significant increase in mortgage and corporate bond spreads. UK monetary policy also affects foreign credit spreads, consistent with the extensive presence of large international players in the UK financial intermediation sector. We finally propose a novel test of overidentifying restrictions, which exploits the availability of the narrative series of monetary policy shocks constructed by Cloyne and Hurtgen (2016), and find that our high-frequency monetary policy surprises are not significantly affected by non-monetary news.

Inflation dynamics in Uganda: a quantile regression approach

ABSTRACTThis paper considers the measurement of inflation persistence in Uganda and how this has changed over time within different quantiles. The measures of inflation include headline inflation and two measures of core inflation. The results suggest that while a unit root is found in many of the upper quantiles of headline inflation, there is evidence of mean reversion within the lower quantiles, which implies that large positive deviations influence the permanent behaviour of inflation. In addition, we find higher levels of persistence after 2006 and during the inflation-targeting period, where potential structural changes may have arisen within the regression quantiles.

Estimating a New Keynesian Wage Phillips Curve for South Africa

Abstract This article estimates a New Keynesian Wage Phillips Curve for South Africa to investigate the responsiveness of nominal wages to labor market conditions. The estimation is based on a model with staggered nominal wages setting, where all variations in hired labor input are taking place at the extensive margin. First, we estimate the model using aggregate data from 1971 to 2013. Aggregate estimation results show that private sector nominal wages are not very responsive to employment conditions, while they also reveal a certain sensitivity to inflation and quite a good correlation with inflation expectations. On the other hand, the relationship between nominal wage inflation and price inflation is quite strong and robust for the whole sample. However, it becomes quantitatively weak for the inflation targeting period. In that period, trade unions’ inflation expectations are, instead, strongly correlated with nominal wage inflation. In the second part of the article, we assess the response of nominal wages to employment, labor productivity, and output prices, given the reservation wage using a panel of nine industrial sectors over the period 1970–2013. The findings confirm that nominal wage inflation has consistently outpaced the growth in productivity, even after correcting for price inflation, and that employment conditions had little effect on wage dynamics. We also test for the possibility that the dynamic of wages is anchored by an underlined reservation wage to investigate the presence of an error correction term in the wage equation for South Africa. The overall picture that emerges from the analysis is that of a wage formation mechanism that is very insensitive to overall macroeconomic conditions.

Exchange Rate Pass-Through in Brazil: А Markov Switching DSGE Estimation for the Inflation Targeting Period

This paper investigates the nonlinearity of exchange rate pass-through in the Brazilian economy during the inflation targeting period (2000–2018) using a Markov-switching new Keynesian DSGE model. We find evidence of two distinct regimes for exchange rate pass-through and for the volatility of shocks to inflation. Under the so-called ‘normal’ regime, the long-run pass-through to consumer prices inflation is estimated as almost zero, only 0.00057 of a percentage point given a 1% exchange rate shock. In comprasion, the expected pass-through to inflation under a ‘crisis’ regime is 0.1035 of a percentage point, for the same exchange rate shock. These results allow us to identify four distinct cycles for exchange rate pass-through during the inflation targeting period in Brazil, and suggest that higher central bank credibility and anchored inflation expectations may be related to lower levels of pass-through.

Time‐Varying Dynamics of the Norwegian Economy

AbstractWe use time‐varying parameter vector autoregressive models to investigate possible changes in the time‐series properties of key Norwegian macroeconomic variables since the 1980s. Notably, we find that inflation persistence falls during the inflation targeting period, while the volatility of inflation and nominal exchange rates increases. The observed time‐variation in the correlations between the interest rates and the macro variables largely reflects the prevailing monetary policy regimes. An increase in the correlations between oil prices and other macro variables over time is also documented. Using a counterfactual analysis, we discuss the observed time‐varying dynamics of the Norwegian economy in the light of monetary policy and oil price shocks.

KREDIBILITAS BANK SENTRAL DAN PERSISTENSI INFLASI DI INDONESIA

Hubungan kredibilitas bank sentral dan persistensi inflasi masih menjadi kontroversi, padahal kepastian hubungan ini sangat penting untuk merumuskan kebijakan anti inflasi yang tepat. Tujuan penelitian ini adalah untuk mengukur tingkat persistensi inflasi dan menguji dampak kredibilitas bank sentral terhadap persistensi inflasi di Indonesia sejak penerapan inflation targeting framework dengan menggunakan model New Keynesian Phillips Curve Hybrid. Hasil penelitian menunjukkan bahwa persistensi inflasi pada periode Full-Fledged Inflation Targeting (2006:1-2012:3) lebih rendah jika dibandingkan dengan periode Inflation Targeting Lite (2000:1-2005:4). Sementara itu, kredibilitas bank sentral berpengaruh secara signifikan terhadap persistensi inflasi pada saat Indonesia menerapkan Full-Fledged Inflation Targeting, sedangkan pada saat Indonesia masih menerapkan Inflation Targeting Lite, kredibilitas bank sentral tidak berpengaruh terhadap persistensi inflasi. Ini menunjukkan bahwa perilaku inflasi di Indonesia masih bersifat backward looking pada masa penerapan Inflation Targeting Lite dan berubah menjadi forward looking setelah mengadopsi Full-Fledged Inflation Targeting. Perubahan ini ada kaitannya dengan meningkatnya kredibilitas bank sentral pada periode Full-Fledged Inflation Targeting.

Does Monetary Policy Regime Determine the Nature of the Money Supply?: Evidence from Seven Countries in the Asia-Pacific Region

This paper tests empirically the causal relationship between bank loans and the monetary base before and after the adoption of inflation targeting in seven Asia-Pacific countries using Toda-Yamamoto Granger non causality test and the bootstrap test for causality. The most striking finding is that the bank loans Granger cause the monetary base during the inflation targeting period in all the countries, except Japan, which was under the influence of the quantitative easing, whereas the causality appeared diverse before the inflation targeting regime. This result implies the need for the policy makers to take the endogenous nature of the money supply into account in the modern economy.

Effects of monetary policy shocks on exchange rate in small open Economies

This study empirically investigates the effects of monetary policy shocks on exchange rates in four small open economies (United Kingdom, Canada, Sweden, and Australia) by using VAR models in which sign restrictions on impulse responses are imposed to identify monetary policy shocks. The main empirical findings are as follows. (1) A contractionary monetary policy leads to significant exchange rate appreciation. (2) The delay in overshooting is relatively short, at best six months. (3) The deviation from the UIP condition is relatively small, although significant at short horizons in a few cases. To obtain results without strong puzzles, constructing an empirical model that reflects the features of the small open economy and estimates the model for the recent inflation-targeting period during which monetary policy operating procedure does not change substantially are important.

POLÍTICA MONETÁRIA E PREÇOS DE ATIVOS NO BRASIL: UMA AVALIAÇÃO EMPÍRICA PARA O PERÍODO DE METAS PARA A INFLAÇÃO

Este artigo investiga a reação da política monetária do Banco Central do Brasil (BCB) às oscilações nos preços das ações e na taxa de câmbio no período de metas de inflação. Em adição, verifica-se se a taxa Selic tem respondido de forma assimétrica aos desvios positivos e negativos do hiato dos preços dos ativos. Para isso, diferentes especificações da função de reação forward-looking do BCB são estimadas pelo Método Generalizado dos Momentos. Os resultados mostram que, no curto prazo, o BCB tem respondido de forma simétrica aos hiatos positivos e negativos da taxa de câmbio, mas não tem reagido ao hiato do preço das ações. Em adição, as estimativas dos parâmetros implícitos da função de reação indicam que apenas a resposta de longo prazo da taxa Selic ao hiato da inflação esperada é significativa. Isso está em conformidade com a visão teórica de que a autoridade monetária deve responder apenas indiretamente aos preços dos ativos, na medida em que esses preços sinalizem alterações na inflação esperada.

Disagreement in expectations about public debt, monetary policy credibility and inflation risk premium

This paper analyzes the determinants of the inflation risk premium in Brazil during the Inflation Targeting period. In particular, different from the existing studies, we analyze the influence of both public debt expectations and disagreement in expectations about public debt on the inflation risk premium, and also the effect of monetary policy credibility on the inflation risk premium. The findings bring two important policy implications. One related to the effect of the expectations formed for the commitment of the government with debt management; and the other related to the effect of the expectations formed for the central bank’s commitment with the Inflation Targeting regime. The results suggest the disagreement in expectations about the public debt affects the inflation risk premium. Furthermore, the findings also suggest the degree of anchorage of inflation expectations in relation to the inflation target (i.e., the monetary policy credibility) affects the inflation risk premium.

Asymmetric exchange rate pass-through in an emerging market economy: The case of Mexico

This paper applies a nonlinear Autoregressive Distribute Lag to examine the exchange rate pass-through into consumer price inflation in Mexico. Overall, the evidence confirmed that ignoring the asymmetric (sign) effect of exchange rate movements on inflation may lead to incorrect inferences and policy conclusions. Exchange rate fluctuation is transferred to prices level more during currency depreciation than appreciation. We compare the macroeconomic performances between pre- and post-inflation targeting, and our findings reaffirmed that the pass-through has weakened significantly after launching inflation targeting in 2001. This result implies that low inflation in the sample period examined is good for Mexico because exchange rate pass-through declines after 2001. Consumer prices have become less responsive to exchange rate movements. We further observe a revival (strengthening) of oil price pass-through to domestic inflation in the post- inflation targeting period.

KREDIBILITAS BANK SENTRAL DAN PERSISTENSI INFLASI DI INDONESIA

The relationship between the credibility of the central bank and the persistence of inflation is still ambigous as this information is crucial in setting the appropriate policy for combating an inflation problem. The objective of this paper is to measure the rate of inflation persistence and to examine the importance of the credibility of the bank central on the persistence of inflation in Indonesia by using the New Keynesian Phillips Curve Hybrid. It is found that the persistence of inflation in the period of full - fledged Inflation Targeting (2006:1-2012:3) lower when compared with the period of Inflation Targeting Lite (2000:1-2005:4). Meanwhile, the credibility of the central bank is significantly influencing the persistence of inflation only when Indonesia was implementing the Full-Fledged Inflation Targeting. When Indonesia was applying the Inflation Targeting Lite, the impact of bank central credibility on persitence inflation was not significant. These findings indicate that the behavior of inflation in Indonesia was backward looking during the periode of Inflation Targeting Lite and becoming forwardlooking after adopting the Full-Fledged Inflation Targeting Policy. This change is related to the increased credibility of the central bank in the full - fledged Inflation Targeting period.