Inflation Targeting Policy Research Articles

Russian financial market under sanctions

Subject. The article discusses the inflation targeting policy. Objectives. The aim is to determine factors affecting the functioning of the Russian financial market in the context of sanctions. Methods. The study draws on the correlation-regression analysis. Results. The paper reveals a dominant significant gap between the money supply and loans and debt securities of the non-financial sector. The ability of corporations to securitize assets is declining. The need to attract household cash to the Russian financial market was established. Conclusions. If considered, the findings will enable the monetary authorities to select the best tools for regulating the financial market.

Taming inflation: the Brazilian experience of combatting inflation in the last quarter of the 20th century

In the context of a global inflationary spike, a retrospective view on the problem of curbing inflation in Brazil is becoming more relevant than ever. This paper aims at analyzing the measures of inflation targeting policies set in motion by the Brazilian economic stabilization plans over the last quarter of the XXth century. The commencement of “The Lost Decade” in Brazil negated the achievements of “The Brazilian Economic Miracle” which occurred in the first half of the 1970s: inflation hit an all-time high. The only viable solution that led Brazil out of the crisis proved to be the stabilization plan - named “The Real Plan” - carried out in three phases: fiscal adjustment, transition to the Real Value Unit and emission of a new currency - the Brazilian Real. The authors confine their attention to how Brazilian experience of taming inflation helps the country suppress current inflation surge.

Exploring the nexus between inflation targeting and exchange market pressure: Evidence from the global financial crisis

This study investigates the effects of the inflation targeting (IT) monetary framework on the exchange market pressure index (EMPI) across 24 Asian economies from 1998 to 2018, with a particular focus on the period covering the global financial crisis (2008–2018). Employing dynamic panel data modeling and Propensity Score Matching, our analysis reveals a positive impact of implementing the IT on the EMPI. The findings suggest that adopting an IT regime effectively reduces exchange market pressure, demonstrating notable resilience following the global financial crisis of 2008. This highlights that an IT policy enhances the credibility of monetary policy, thereby decreasing the need for central bank interventions in the foreign exchange market within this framework.

Inflation targeting and monetary policy response in India

India adopted the Flexible Inflation Targeting (FIT) regime in 2016 under the mentorship of the Monetary Policy Committee (MPC). With FIT’s introduction, the effectiveness of monetary policy transmission channels required a re-visit and this paper is a valuable contribution in this direction. Using the multivariate model with an augmented Bayesian set- up, we find that FIT-MPC has strengthened the credit and interest rate channels while their impact on output has weakened. The impact of Operation Twist – a set of unconventional measures pursued during the pandemic is visible. Overall, the findings highlight the overhauling effect of monetary policy transmission in the Indian context.

Macroeconomic Analysis and General Economic Equilibrium of Kazakhstan

The paper studies general equilibrium in the economy of Kazakhstan. The purpose of the study is to estimate the equilibrium real interest rate for the economy within current frameworks. The IS-LMBP curves are plotted based on corresponding regression models of the real output measured by GDP. The exogenous variables are taken for the regressions according to the theoretical propositions. The quarterly data for 2008Q1-2022Q4 published in the datasets and bulletins of the Committee for Statistics and the National Bank of the Republic of Kazakhstan were used. Some consequences of the change in the exchange rate regime and in macroeconomic policy framework on macroeconomic relationships were revealed. Effectiveness of using interest rate as an instrument in maintaining inflation targeting policy is still ambiguous for the case of Kazakhstan. This study demonstrates the general equilibrium state of the national economy and specifications of the curves listed above. The results can be used to assign further the nominal interest rate using Taylor type rules

Asymmetry and non-linearity in exchange rate pass-through: Evidence from scanner data

Using retail scanner data from Kazakhstan, an emerging economy with significant and unexpected exchange rate fluctuations, we observe an incomplete yet substantial exchange rate pass-through (ERPT) into prices. Specifically, we note a 50% change occurring a year after the initial shock. The ERPT demonstrates asymmetry in response to exchange rate movements. Notably, the direction of this asymmetry is opposite for imported versus domestic products. Furthermore, our findings indicate that ERPT is non-linear; the price response is more pronounced when the exchange shock is small, aligning with the existence of menu costs. Understanding these asymmetric and non-linear price responses to exchange rate shocks may be crucial for formulating effective inflation targeting policies, especially in emerging economies prone to high inflation.

The Slope of the Phillips Curve and the Optimal Average Inflation Targeting Window

AbstractThe slope of the Phillips curve has been shown to be flatter in recent years, including in Australia. How does this impact the optimal targeting window for a central bank conducting an average inflation targeting policy? This article shows that, in the face of the flattening of the Phillips curve, it is desirable to increase the targeting window. Doing so would lead to lower inflation fluctuations and to a non‐trivial welfare gain. In a persistently higher‐than‐target inflation, high‐interest‐rate environment, this implies that the central bank should keep the nominal interest rate higher for longer.

What has inflation targeting done for household consumption?

Whether households’ consumption level in an Inflation-Targeting (IT) regime, which steers inflation and its expectations, differs from that of a non-IT regime remains empirically unexplored. Using IT as a treatment and acknowledging the potential for country heterogeneity and material confounding factors, we leverage several treatment methods to study the causal, dynamic IT effect on aggregate household consumption across developed and developing countries. We find significant heterogeneous IT effects on aggregate consumption levels in two-thirds of the IT sample. The heterogeneity does not support the notion of an isomorphic average causal IT effect on household consumption across countries. The government’s willingness to meet IT policy adoption preconditions and the country’s fiscal profile are critical drives of this parameter heterogeneity in developing and developed countries. However, the central bank’s appetite for restricting exchange rate movements contributes to this heterogeneity in only developing countries. We find that macroeconomic uncertainty proxied by the inflation level, inflation variability and output growth variability are essential channels in developing countries. In addition, financial development and savings are crucial channels across development status.

Is inflation targeting effective? Lessons from global financial crisis and COVID‐19 pandemic

AbstractThis paper explores the influence of inflation targeting (IT) policy on macroeconomic performance in 24 Asian economies by taking a wide range of macroeconomic variables from 2001 to 2022. Specifically, the study seeks to evaluate the influence of IT on macroeconomic performance during the global financial crisis (GFC) and the COVID‐19 pandemic periods separately. The empirical analysis comprises three approaches: propensity score matching, difference‐in‐differences, and panel‐corrected standard error methods. The empirical investigation reveals that IT significantly impacts inflation and its volatility during the GFC. In contrast, the effect on the unemployment rate is not statistically significant. Further, IT statistically influences the inflation and unemployment rates throughout the COVID‐19 pandemic. In contrast, its impact on inflation volatility during the COVID‐19 pandemic is not evident. Our results have significant policy implications for the Asian economies. It may be suggested that low‐income countries could benefit from implementing IT policy as a tool to ensure stable inflation. However, there is a need for continuous policy adaptation and targeted interventions to address evolving economic challenges, especially in situations like crises.

Inflation Targeting in South Africa

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

Bank credit, expected inflation rate, and financial dynamics

We investigate the effects of debt–capital ratio and expected inflation rate on the stability of the economy using a Minsky model and reconsidering Fisher’s debt-deflation theory. We have developed static and dynamic models that formalize an inflation-targeting policy. The static model reveals that an increase in the debt–capital ratio may negatively impact the profit rate and that the Fisher proposition is invalid. Our dynamic model indicates that the economy can become endogenously unstable. When the debt–capital ratio is high and the sensitivity of nominal wage rate to the profit rate is higher than that of bank lending, it may lead to debt-deflation. Finally, we demonstrate that the central bank alone can make only a limited contribution to economic stability.

Infrastructural power, institutional karma, and existential choices

AbstractLeon Wansleben’s new book, The Rise of Central Banks: State Power in Financial Capitalism, tells an intricately complex story of the world’s most influential central banks successfully harnessing the forces of financial globalization to build their institutional power as the principal managers of their national economies. The book argues that, regardless of central banks’ rationales and rationalizations, the resulting expansion of global money markets has failed to generate the intended macroeconomic and societal benefits. Instead, as became evident in the post-2008 era, the world’s most powerful central banks are now structurally dependent on the increasingly self-referential markets for financial assets. While the book’s narrative is focused on inflation targeting and other monetary policy innovations since the 1970s, it raises much broader questions and invites further reflection on the nonlinear dynamics of power in today’s financial markets and the uncertain future of central banks.

Soaring public debt: Return of financial repression and high inflation?

The global economic crisis caused by the COVID-19 pandemic has once again shown the key role of fiscal stimulus. At the same time, in many developed countries, stimulating monetary policy was limited by the already achieved zero interest rates. But the fight against the consequences of the coronavirus with fiscal policy instruments had a negative effect in the form of an increase in the state budget deficit and, as a result, in public debt. According to the Institute of International Finance (IMF), by the end of 2022, global debt reached $297 trillion, or 349%. The public debt in the world reached 102% of GDP in 2022, which is a historically high value since the 1960s. In 2023, global debt continued to grow in nominal terms: according to the IMF, in Q1 2023, it has already increased by $8.3 trillion to $305 trillion. The risks of rapid growth in public debt in developed and developing countries were even before the COVID-19 pandemic. But after a period of stimulus fiscal measures in 2020—2021 the public debt problem has worsened, raising fears that the practice of financial repression could become a reality for the next decade. Accelerating global inflation increases incentives for governments to use financial repression to eliminate the public debt burden. At the same time, financial repression, in turn, may imply a decrease in the effectiveness of the inflation targeting policy, as a result of which there are risks that high inflation will become more sustainable.

Dynamic Relationship Between External Debt, Inflation, and Exchange Rate in Lao PDR

This study investigates the dynamic relationship between external debt, inflation rate, and the exchange rate of the Lao Kip (LAK) against the US dollar over the period of 2000 to 2021. Utilizing time series data and the Autoregressive Distributed Lag (ARDL) Model, we analyze the impacts of these economic variables in both the short and long run. Our estimation results reveal a significant long-term positive relationship between external debt and the inflation rate with the exchange rate. Inflation rate and external debt have a significantly positive impact on exchange rate in the long run, while short-term analysis indicate a negative relationship between external debt and the inflation rate with the exchange rate. economic shocks or short-term fluctuations may disrupt the exchange rate, the system has a strong tendency to return to its long-term equilibrium point at a brisk pace. The policy implications are discussed. Therefore, policymakers must maintain a stable and controlled inflation environment. Inflation targeting and other monetary policy measures can be utilized to ensure that inflation remains within a manageable range. Keeping inflation under control can help stabilize the exchange rate and safeguard the country's economic stability.

Fresh Insight on the Determinants of Economic Growth with Focus on Inflation-Growth Nexus Evidence from Developing Countries

This study is the empirical effort of inquiring the link between inflation and economic growth in the context of other factors determining economic growth in selected developing countries. While utilizing Generalized Method of Moments (Difference and System GMM), the study found an inverse insignificant connection between inflation and economic growth. Furthermore, the sample developing countries tend to have highly positively evaluated by their lagged economic growth as well as the government consumption expenditures and agriculture sector productivity and all of these are having robust role on economic growth. Additionally, the economic impact of trade openness and money supply is mixed and even significant in some cases designating that developing countries can improve their economic growth through financial and trade development. These findings help rethink economic policy makers in developing countries for following inflation targeting policies and to utilize their public developmental expenditures to improve their primary sector (agriculture) productivity in order to enhance economic growth.

On the effectiveness of the interest rate channel within inflation targeting in Ukraine: a VAR approach

Assessing the effectiveness of the inflation targeting framework via the interest rate channel remains crucial in the current monetary policy debate. For Ukraine, the relevance of this discussion is enhanced by the adoption by the National Bank of a rigid inflation targeting policy since 2016, as well as by the challenges of price stability during war. The aim of the study is to identify how the discount rate affects the money market rates and how this affects inflation in Ukraine. Employing a VAR model on monthly data spanning 2016 – Q1 2022, the analysis demonstrates weak empirical evidence for the interest rate channel effectiveness. The impulse response indicates that the discount rate’s initial effect does not provide long-term inflation dynamics control. Variance decomposition analysis highlights the minimal influence of the NBU’s discount rate, primarily evident in the refinancing rate, followed by its impact on the rate of term deposits made by individuals, followed by the inflation, followed by the rate of new loans granted to residents, and finally the rate of government bond yields. Addressing the limitations of a rigid inflation targeting approach, the study recommends adopting a balanced approach, considering both price stability supported by exchange rate control measures and fostering economic growth. Additionally, a viable strategy for deepening the financial sector should be developed.

INFLATION AND ECONOMIC GROWTH TRENDS: GLOBAL AND SOUTH AFRICAN PERSPECTIVES

This paper explores the global inflation and economic growth trends, with a special focus on South Africa, from the 1970s – the period marked by the crumbling of the Bretton Woods system and the ensuing stagflation – to 2022. Our exploration reveals that global inflation is driven mainly by advanced economies, and there are signs of a negative correlation between the levels of income and inflation rates. We observed a structural break in global inflation in 1995 when inflation substantially decreased and became more stable than before. Our analysis links this structural break and stability in inflation to the emergence of strict monetary policy regimes like inflation targeting. Emerging and developing economies experienced a substantial decrease in inflation after they adopted inflation-targeting policies, as compared to advanced economies. In contrast, AEs benefitted from a significant rise in their economic growth. For South Africa, the trends in inflation and economic growth displayed a different picture. Although negligibly, South Africa’s inflation rose three years after adopting inflation targeting. During the same period, the South Africa experienced rising economic growth. To better understand the relationship between inflation and economic growth, we suggest the use of extensive data and models to investigate the structural breaks experienced.

Analysis of Symmetric and Asymmetric Effects of Exchange Rate Pass-Through in Inflation-Targeting Countries

The main purpose of this study is to analyze the effects of symmetry and asymmetry of the exchange rate pass-through in Middle-Income and High-Income countries that implement inflation-targeting policies. This study uses a sample of Middle-Income Countries (South Africa, Brazil, India, Indonesia, and Mexico) and High-Income Countries (Australia, Japan, Canada, Norway, and Sweden) in the form of time-series 2000:Q1- 2021:Q4 with the method of Autoregressive Distribution Lag (ARDL) and Nonlinear Autoregressive Distributed Lag (NARDL). The results showed that five countries have a significant positive effect on the real exchange rate on inflation in the short-run in the ARDL method. In addition, in the NARDL method, five countries significantly positively affect the depreciation of the real exchange rate on inflation in the short-run. Then, only one country has a significant negative effect between the appreciation of the real exchange rate on inflation in the short-run and eight countries in the long-run. Based on the estimation results, it can be concluded that the average quantity of real exchange rate effect on inflation (exchange rate pass-through) in Middle-Income Countries is greater than in High-Income Countries. Therefore, inflation-targeting policies are more flexible to be applied in high-income countries. In addition to the exchange rate, other variables such as oil prices, money supply, and real GDP also greatly affect inflation and have different effects in each country.

Inflation targeting and fiscal policy volatility: Evidence from developing countries

This paper studies the effect of inflation targeting (IT) on fiscal policy volatility. Using data for 83 developing countries over 1985-2020, estimations based on impact analysis methods reveal that IT adoption reduces fiscal policy volatility. This result is robust when using a wide set of alternative specifications related to additional control variables, different samples, alternative measures of the main variables, or alternative estimation methods. Consequently, contributing to the ongoing literature on fiscal policy volatility, our results suggest that reforms of the monetary policy management in the form of IT adoption may provide a useful policy for fighting fiscal discretion towards a reduction of fiscal policy volatility.

Integrating Estimation of Inflation Threshold and Nowcasting Regional Economic Growth Using Classical, Machine Learning, and Ensemble Method

In line with the global economic recovery, Indonesia's post-pandemic economic recovery is experiencing major challenge caused by uncertainty due to increasing inflationary pressure. Efforts to reduce inflationary fluctuations were carried out by the government in order to maintain optimal economic growth under the inflation targeting policy framework. Hence it is necessary to inspect the inflation threshold for economic growth in determining the inflation target. This study attempts to integrate inflation threshold estimation and nowcasting modelling of regional economic growth as an early warning system for achieving the government's economic growth target by utilizing several classical, machine learning, and ensemble models. Threshold estimation for the National level and East Java is applied to provincial groups obtained from clustering time series with dynamic time wrapping (DTW), author's justification, and the west-east region. In addition, estimates were also carried out in the period before Covid-19 as well as the entire period and the addition of predictor variables to test the sensitivity of the inflation threshold estimate. The results show that there was a non-linear relationship between inflation and economic growth with an inverted U shape. There are differences in the inflation threshold range due to provincial groupings, addition of control variables, both for the National level and for East Java. Evaluation of the inflation level in East Java and eight cities shows that in several periods, East Java inflation has exceeded Bank Indonesia's ITF target. Taking into account the estimated threshold range, it is recommended to set a more flexible inflation target at the regional economic level. Finally, the results of nowcasting with several specifications, such as the use of machine learning models and weighted ensemble models based on accuracy, as well as out-sample predictions with one-step ahead can improve the accuracy and consistency of the model for both short-term and long-term.