Inflation Targeting Policy Research Articles

Regional house price convergence: implications of monetary policy

ABSTRACT Motivated by the structural change since the adoption of inflation targeting in October 1992, this research investigates regional house price convergence in the UK over the period 1973:Q4–2020:Q4. By using subsample comparisons, results show that all regions in the inflation-targeting regime converges to one club until the Global Financial Crisis. The finding suggests that the successful inflation-targeting policy can promote integration among regions.

Performances of selected European economies in achieving their inflation targets: The non-stationary discrete choice model approach

AbstractMeasurement of the performances of inflation targeting (IT) frameworks has been of interest to researchers ever since IT began to be implemented as a monetary policy strategy. The purpose of this paper is to evaluate the impact of domestic and international determinants on success in achieving inflation targets of the selected European economies. Our methodological framework is based on the application of a non-stationary discrete choice model. For this research, four European economies are considered: Czech Republic, Hungary, Poland and Serbia. Their results regarding IT policy can provide a useful benchmark for similar economies that are either planning to adopt the same monetary policy framework or have begun to apply it recently. Our findings indicate that IT success is primarily under the control of monetary policymakers by key policy rate mechanism, but that the impact of additional domestic and international factors that are not easily managed by the central bank like budget balance, exchange rate, growth rate, current account balance, labor cost growth, loans, Harmonized Index of Consumer Prices, inflation, and GDP gap of the Eurozone, can be also significant. Consequently, monetary policymakers need to take into account a wide range of inflation factors, including foreign spillover effects, so that tools for their neutralization can be helpful in achieving the targeted goals.

Has the Asymmetric Effect of Oil Price Change in Inflation Expectations Been Impacted by the COVID-19 Outbreak? A Comparison Between the United States and China

Economists and policymakers believe that households’ and firms’ expectations of future inflation are key determinants of actual inflation. This paper applies the ARDL model and nonlinear ARDL model to long-term inflation-targeting policy mechanisms in the United States and China to assess the impact of oil price dynamics and asymmetries on inflation expectations, as well as the difference of this impact before and after the COVID-19 pandemic. In order to show the significant role of the COVID-19 outbreak, this paper includes the data from 2010 to 2021 and takes the pandemic period as a structural break. Taking oil price changes as a variable of interest, and introducing some other significant variables, we find that during the pandemic, the positive impact of oil price shock on U.S. inflation expectations has enhanced, whereas the positive impact on Chinese inflation expectations has weakened. There is also sufficient evidence of the existence of the asymmetric effects of oil price changes on inflation expectations in both countries, but the positive oil price change in the United States has always played a larger role than the negative oil price shock. In China, the impact of positive oil price shock was greater than that of negative oil prices before the epidemic and the effect of negative oil price shocks has increased significantly in the COVID-19 regime.

Inflation Targeting and Economic Growth in Developed and Developing Countries: Evaluation of the Policy Effectiveness Using CS-ARDL Approach

High inflation is one of the destabilizing factors for macroeconomic situation in a country since it decreases household income and enhances production costs. Some researchers note that rising prices lead to a decline in economic growth, therefore the monetary policy of the central banks in the world implements inflation targeting policy to achieve consistently low inflation. Despite the fact that a number of countries uses this policy regime, the scientific community continues debates about the effectiveness of the inflation targeting. In particular, it is still not obvious whether inflation targeting policies promote economic growth in the countries implementing them or, on the contrary, lead to economic slowdown. The purpose of the study is to assess the impact of the inflation targeting regime implementation on the economic growth in developed and developing countries and estimate the effectiveness of such policies. The hypothesis of the study assumes that the inflation targeting policy stimulates economic growth, however, its effectiveness is greater for developing countries than for developed ones. For econometric modeling, we use time-series panel data for 63 countries ranged 1980–2021. Given the length of the period and cross-sectional dependency, we apply the Cross-Section Augmented Auto-regressive Distributed Lags (CS-ARDL) approach. The results of the study demonstrate a positive impact of inflation targeting on economic growth. Moreover, we document that implementation of this policy spurs economic growth in the developing countries, while no such effect is observed for developed economies. The study fills the gap in the existing literature on the inflation targeting effectiveness analysis and points the need for choosing different instruments to address inflation in developed countries. The practical significance of the study lies in the fact that the results obtained confirm the effectiveness of inflation targeting for developing countries and its absence for developed countries.

РЕГУЛЮВАННЯ ВАЛЮТНОГО РИНКУ УКРАЇНИ В УМОВАХ ФІНАНСОВОЇ НЕСТАБІЛЬНОСТІ ВОЄННОГО ЧАСУ

The article examines the peculiarities of the functioning of the currency market of Ukraine since the beginning of the full-scale invasion. The exchange rate dynamics in the pre-war period are shown and the factors of its formation in 2022-2023 are determined. It is noted that a significant inflow of capital into the country in the form of foreign aid from allied countries makes it possible to compensate for the foreign currency deficit. The NBU's measures to maintain exchange rate stability and their consequences for the monetary sphere in general and the foreign exchange market, in particular, are analyzed. Based on the study of risks and threats to the stability of the foreign exchange market, appropriate measures of the NBU to neutralize them in the conditions of martial law have been determined. The expediency of fixing the exchange rate at the current stage and the conditions for restoring the regime of flexible exchange rate formation are substantiated. It is established that during the period of martial law, financial markets remained stable due to the significant inflow of non-market capital into the country, the application of a fixed exchange rate and currency restrictions. Such positive consequences of maintaining a fixed exchange rate of the hryvnia as curbing the volatility of the foreign exchange market, reducing the cost of risk insurance, reducing the vulnerability of the economy to changes in capital flows, and stabilizing Ukraine's debt position have been identified.The directions for improving the regulation of the foreign exchange market in the short and long term are outlined. The NBU's strategic direction regarding the regulation of the foreign exchange sphere is the movement towards the gradual weakening of currency control and the removal of currency restrictions introduced at the beginning of the war, the transition to flexible exchange rate formation and the return to the monetary policy of inflation targeting. The restoration of production and the adjustment of transport logistics (opening of ports and/or setting up of alternative transportation routes), the revival of exports and the growth of foreign exchange earnings from other sources will ensure an increase in the supply of foreign currency on the market. After the cessation of hostilities, the NBU should conduct an exchange rate policy taking into account the tasks of post-war reconstruction, balancing between the stimulation of imports and the attraction of foreign investments

Аналіз тенденцій розвитку грошово-кредитної системи України

The successful functioning of the national monetary system determines the efficiency of the country’s money circulation, the effectiveness of monetary regulation measures taken by the country’s central bank, and the ability to meet the needs of consumers for various financial services, as well as the effectiveness of measures to rebuild our economy in the post-war period and the ability to function normally under martial law. The purpose of the article is to analyze the trends in the development of the monetary system of Ukraine, to identify the stages of its formation along with the main problems in the current period. The publication examines the formation and stages of development of the monetary system in Ukraine, namely, identifying the following key stages: since 1991 – the beginning of the institutional formation of the monetary system; since 1996 – introduction of the national currency; since 1999 – overcoming the global financial crisis of 1998 and further development of the national monetary system; since 2009 – overcoming the consequences of the global financial crisis of 2008; since 2015 – overcoming the consequences of the russian-Ukrainian war of 2014; since 2020 – overcoming the consequences of the global financial crisis of 2019, accelerated by the coronavirus pandemic; since 2022 – stabilization and overcoming the consequences of the active phase of russia’s aggression against Ukraine. Some key indicators characterizing the country’s monetary system are analyzed, namely: the dynamics of the country’s monetary base, changes in the discount rate, annual growth in the consumer price index, dynamics of the number of operating banks and their assets, dynamics and structure of loans granted by banking institutions, changes in the return on assets and capital of banking institutions. The main risks and causes of their occurrence in the monetary system of Ukraine during the wartime are analyzed. The main current problems of the monetary system of Ukraine in the wartime period are identified, and some directions for overcoming them are proposed. It is proposed that in order to sanitize the banking sector, it is necessary to withdraw insolvent banks from the market; to ensure inflationary stability, it is necessary to ensure a return to the implementation of inflation targeting policy; to restore the economy, in particular the real sector, it is necessary to ease the requirements for regulating loaning activity, to introduce instruments for targeted stimulation of loaning activity of banking institutions.

THE ROLE OF INFLATION TARGETING ON EXCHANGE RATE VOLATILITY: AN EVIDENCE FROM PROPENSITY SCORE MATCHING APPROACH

This study examines the treatment effects of inflation targeting on exchange rate volatility across a large panel of 91 (36 inflation targeting) countries over the 1985-2019 period on annual basis. We apply propensity score matching methods to developed, developing, and high-income inflation targeting countries and non-inflation targeting countries. Our results reveal that, on average, adopting the inflation targeting policy exerts lower exchange rate volatility in all sample and developing economies. However, subgroups results demonstrate that inflation targeting regimes may lead to higher exchange rate volatility in developed and high-income economies. The outcome from different degrees of flexibility of exchange rates subgroups points out that the inflation targeting regime has significant and lower exchange rate volatility under free-floating regimes however this policy stance has no discernible effect on floating regimes. Additionally, adopted inflation targeting countries are affected by less damage on exchange rate volatility than those adopting exchange rate targeting regimes.

Дослідження впливу кваліфікуючих факторів на інвестиційно-інноваційні процеси в умовах сучасних викликів

This article explores the influence of qualifying factors on investment and innovation processes in the face of modern challenges. The influence of Ukraine's positioning in world rankings on the dynamics of investment and innovation processes is determined, which determines the degree of confidence of a foreign investor and highlights the main obstacles to the formation of an innovation-active environment within the country according to the structural components of the indices. Attention is paid to the scientific discussion of the issue of protecting the rights of minority shareholders, which has become aggravated with the implementation of the principle of liberalization of the Ukrainian financial market. The tendencies of the increase in the cost of borrowed resources within the country in connection with the policy of inflation targeting are considered, which reveals the difference between the planned and actual inflation target, since an increase in the discount rate is a managerial lever for reducing inflation. Attention is focused on a fairly high share of NPL loans in the structure of the loan portfolio of commercial banks, which necessitated improving access to credit information through the creation of a new public credit registry based on the NBU. The need has been identified for increasing the volume of the resource base, in particular with increasing the share of external sources of financing, which will help ensure competitive conditions for the implementation of the financial and economic activities of national producers. The expediency of introducing managerial financial and economic levers for the development of medium- and long-term financial instruments in the context of financing investment and innovation processes is substantiated.

Ўзбекистонда инфляцияни таргетлаш сиёсатига ўтиш босқичида макроиқтисодий кўрсаткичларини прогнозлаш

In this paper, forecasted the main macroeconomic indicators, such as inflation, economic growth, nominal wages, money supply and exchange rate in the context of the transition to inflation targeting policy in Uzbekistan. The medium-term forecasting covers the periods from Q1 2022 to Q4 2024 using AR, VAR, ARIMA and DF models. Also, the accuracy of the forecasting model results checked by MSE, MAE and MAPE methods. Furthermore, developed conclusions and suggestions based on forecast results.

Institutional aspects of monetary policy formation: russian and foreign practice

In the article, the authors consider the issues of monetary policy as one of the main components of the economic policy of the state. A key role in the formation of monetary policy belongs to Central banks, which focus their activities on ensuring price or monetary stability, stability of the purchasing power of the national currency. The authors analyze the intermediate targets of monetary policy and its regimes carried out by economically developed countries of the world: monetary targeting, exchange rate targeting, inflation targeting or inflation targeting. An assessment is given of the Central Bank of the Russian Federation inflation targeting policy, which uses interest rate policy as the main instrument of monetary regulation, as one of the main channels of monetary policy impact on the economy, namely, changing the conditions for financing the real sector of the economy through the financial market.

Inflation targeting policy as a monetary policy tool of the national bank

Monetary policy, which is carried out by national banks, has a great impact on the state of the monetary sphere of the country and on the state and development of the national economy. This article analyzes the dynamics of inflation in Russia. The article considers the targeting of the inflation rate as the main instrument of the monetary policy of national banks, and also provides the conditions for targeting inflation. In addition, the paper provides monetary policy regimes.

Monetary policy and long-run share price reversals on the Johannesburg Securities Exchange

Purpose: The study expounds on the phenomenon of long-run reversal and monetary policy in the financial markets. The study used Johannesburg Securities Exchange (JSE) data to determine whether the monetary policy changes implemented by the South African Reserve Bank impact long-run reversals in the JSE. Context: Long-run share value reversals have occurred in various regional financial markets in the US, Europe, Asia, and South Africa. Long-run share value reversals occur when firms with poor past performance rebound and produce superior returns compared to firms with good historical past performance. South Africa has a monetary policy of inflation targeting, leading to upward lending rate adjustments whenever consumer inflation threatens to exceed 6%. Methods: The regressions of the Fama-French three factors model and Fama-MacBeth model were used to estimate the relationship between the excess return of different portfolio returns and the Fama-French three factors. Furthermore, we split our sample under expansive and restrictive monetary conditions. We ran the regression of the Fama-MacBeth model again to see whether the monetary conditions will influence the long-run share price reversal. Results: The sample results over the near 15-year sample period showed that firms with poor past performance failed to outperform those with past solid performance. The gap is closed under restrictive monetary conditions that tighten the liquidity conditions of an economy. In addition, monetary policy changes led to long-run reversals among poor performing firms. Practical value: The study contributes to momentum theory. It is recommended that further research do a detailed examination of the relationship between firm characteristics and long-run reversals under various monetary conditions. Monetary conditions are worth watching for when constituting a portfolio because they create arbitrage opportunities for astute investors.

ASYMMETRIC DEPENDENCE BETWEEN EXCHANGE RATE AND COMMODITY PRICES IN GHANA

An increase in globalization and financial integration has induced countries to depend on each other to survive. This has facilitated trade and investments among economies across the globe. It is expected that countries’ international economic activities would contribute to the rate of exchange between the countries. However, uncertainties may alter the dynamics of exchange rate movements, thereby minimizing the contribution of its economic activities at various market conditions. In this regard, we examine the influence of variations in prices of commodities on nominal exchange rate in Ghana. Hence, we employ quantile regression with monthly data spanning from September 2007 to December 2020 for the variables — nominal exchange rate, cocoa, gold and Brent crude oil prices. We find a significant connection among the variables for most quantiles. Also, the study reveals that an upsurge in the price of crude oil corresponds to an appreciation of the Ghana Cedi during turbulent conditions. Conversely, cocoa price tends to appreciate the Ghana Cedi for both normal and extreme market conditions. We recommend that for the country to enjoy favorable exchange rate at all market conditions, there is a need for the producers of these exported commodities to be incentivized by the government in the form of subsidies, new technological equipment and education in order for the producers to increase their efficiency and add value to these commodities while effective inflation targeting policies are deployed. Implications for the study are further provided.

Exchange Rate Crisis among Inflation Targeting Countries in Sub-Saharan Africa

The exchange market pressure index has proven to be a major indicator in identifying exchange rate crises in economies; however, due to the complexities surrounding developing economies, the efficacy of the index has been called to question. Specifically, the selection of an appropriate index and the problem of selecting the appropriate threshold for identifying exchange market pressure. To investigate this issue, this study identifies exchange rate crisis episodes in South Africa and Ghana using ridge regression, a discrete threshold regression, and Dynamic Ordinary Least Square (DOLS) models. The results are robust in resolving the problems with an exchange market pressure index. They also point to uneven implementation of the inflation targeting policy framework in the studied countries.

Macroeconomic performance of inflation targeting in European and Asian emerging economies

The macroeconomic performance resulting from adopting an inflation targeting policy in emerging economies of Europe and Central Asia are examined. The research includes 26 countries in the period 1997–2019, with a special focus on the period 2008–2019. Our econometric analysis consists of two approaches: dynamic panel modeling and propensity score matching. The results suggest that macroeconomic performance has improved due to the inflation targeting monetary framework. We find that a policy of inflation targeting has been effective in reducing the inflation rate, inflation volatility, and GDP volatility. The results are particularly robust for the subperiod that started in 2008. Econometric results suggest that inflation targeting policy did not affect inflation persistence or GDP growth. Our results suggest that inflation targeting improves the macroeconomic performance of developing countries even when they only partially meet the standard requirements for its implementation.

Does Inflation Targeting Policy Matter for Inflation Performance?

Purpose – Inflation targeting (IT) is a practice that central banks around the world began to adopt as early as 1990. Due to the high accountability and high transparency of central banks under IT policy, the practice expected that inflation targets would have better inflation performance. In this study, it is explored whether inflation targeting policy has positive effects on inflation performance, focusing on inflation persistence. Also, it is explored whether the behavior of inflation rates overshooting or undershooting a target range (or a tolerance band around a target level) is asymmetric. Design/Methodology/Approach – An autoregressive (AR) model is adapted with a self-exciting threshold autoregressive (TAR) model to study inflation persistence before and after inflation targeting was adopted, respectively. To address issues that events unrelated to inflation targeting policy could explain the findings, counterfactual exercises for non- inflation target are conducted. Findings – It was found that inflation target, particularly developed inflation target, have experienced a decrease in inflation persistence after implanting inflation targeting. Also, there is limited evidence on the asymmetrical behavior of inflation rates between overshooting and undershooting an inflation target range, or tolerance band, around a target level. Research Implications – The findings in this study support the positive effect of IT policy on inflation performance. In particular, it is stronger for developed inflation target than less developed inflation target. In addition, the findings support that most central banks do not show asymmetrical responses to inflation rates between overshooting and undershooting a target range or tolerance band around a target level.

The DSGE model and the optimal monetary rule

Inflation targeting policy is a monetary policy framework that ensures a low inflation rate, close to an objective that is usually 2%. Due to deterioration of the relationship between monetary variables and aggregates in many economies, this policy is emerging as a new monetary strategy. Bank Al-Maghrib is part of this process, and thus Morocco has taken the first step in this direction by adopting a more flexible exchange rate regime. Nevertheless, the transition to this regime requires knowledge of the transmission of the interest rate on inflation and output.
 In this article, we determine the optimal monetary rule to accomplish Morocco's transition to inflation targeting. We evaluate this rule by first constructing a DSGE model for a closed economy and then estimating through Bayesian estimation four sub-models (four monetary rules).
 The comparison between models shows that the rule associated with inflation and output targeting with interest rate smoothing allows for better transmission of monetary policy. It is therefore the optimal monetary rule for the eventual implementation of inflation targeting policy in Morocco.
 Keywords: inflation targeting, credibility, economic growth, Neo Keynesian model, monetary rule.

Economic Growth and Inflation: Evidence from Indonesia

This study aims to determine the relationship of economic growth withinflation in Indonesia between 2010 and 2014. The research methoduses static data panel analysis with economic growth as the dependentvariable and inflation, investment, and population as independentvariables. Research shows that inflation, investment, and population,where the three variables have the same aim (positive) relationshipwith economic growth. The effect of investment on economic growthis more significant than inflation on economic growth. The positiverelationship between inflation and economic relations shows thatinflation can increase economic growth. This can be maintainedif the government represented by Bank Indonesia can always keepinflation at a low/mild level. Inflation targeting policy needs to bemaintained by referring to the inflation targeting of previous years.How to Cite:Cili, M. R., & Alkhaliq. (2022). Economic Growth and Inflation: Evidence from Indonesia. Signifikan: Jurnal Ilmu Ekonomi, 11(1), 145-160. https://doi.org/10.15408/sjie.v11i1.19848.

The Effect of Inflation Targeting (IT) Policy on the Inflation Uncertainty and Economic Growth in Selected African and European Countries

The study assessed the effect of inflation targeting (IT) policy on inflation uncertainty and economic growth in African and European IT countries. This study contributes to the existing knowledge by analysing and comparing the African IT and European IT countries using two advanced approaches which include the Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and Panel Vector Autoregressive (PVAR). To determine how the IT policy affects the inflation uncertainty in selected countries, time series techniques were employed. Panel data approaches were used to determine the effect of inflation targeting on economic growth in the selected countries. The results are as follows: (1) Inflation Targeting policy is insignificant in reducing inflation uncertainty in South Africa, and the effect of the policy in Ghana is inconclusive; (2) The IT policy has a significant impact in reducing inflation uncertainty in European countries (i.e., Poland and the Czech Republic); (3) Inflation targeting has a negative impact on economic growth in African Countries; (4) The policy has a positive impact on economic growth in European Countries; (5) In comparison to European countries, the strategy has a negligible impact on economic growth in Africa. Overall, the results suggest that European countries inflation targeting regimes are more credible in terms of reducing the level of inflation uncertainty and sustaining economic growth compared to African countries. In this respect, policymakers must ensure that they assess the economic condition of an individual country before implementing such a policy.

On Robustness of Average Inflation Targeting

This paper considers the performance of average inflation targeting (AIT) policy in a New Keynesian model with adaptive learning agents. Our analysis raises concerns regarding robustness of AIT when agents have imperfect knowledge. In particular, the target steady state can be locally unstable under learning if details about the policy are not publicly available. Near the low steady state with interest rates at the zero lower bound, AIT does not necessarily outperform a standard inflation targeting policy. Policymakers can improve outcomes under AIT by (i) targeting a discounted average of inflation, or (ii) communicating the data window for the target.