Monetary Targeting Research Articles

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.

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.

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.

Fiscal Expansion in The EU and Scale Effect on Growth Deviations of Developing Economies

The accelerating effect of financial support and incentives creates different growing trends in countries representing emerging economies. This phenomenon is the subject of other economic growth models in a process in which the expected public supports positively affects emerging economies, including financial monetary policies. Besides the structural effects of the budgetary expansion phenomenon, this study aims to analyse the contribution to economic growth, especially in countries representing emerging economies within the EU's scope and put forth the scale values for determining possible deviations in response to increasing monetary expansions. These countries have different actual economic growth trends from EU countries, which mean different fiscal policy targets within the scope of the public economy have created other efficiency deviations in expenditure-based policies. It is observed that the fact that public financial support does not appear solely based on public expenditures and that their possible indirect effects on the public budget have a different impact on the target economic growth trends in an expanding fiscal process. Here, the problem for emerging economies is to achieve a controlled fiscal expansion and public spending trends without causing possible macroeconomic deviations from target economic growth. Whether the fiscal-budgetary expansion will include a possible inflationary process in the expansion of the monetary base can also be followed in the empirical process in which the monetary policy targets and the fiscal policies in practice form the basis of possible conflict.

Monetary policy rule, exchange rate regime, and fiscal policy cyclicality in a developing oil economy

According to Frankel and Catao (2011), a commodity-exporting developing economy is advised to target the product price rather than consumer price, as the former monetary policy is automatically countercyclical against the volatile terms of trade shock. This paper constructs a dynamic stochastic general equilibrium model of joint monetary and fiscal policies for a developing oil economy, to find an appropriate monetary rule combined with a pro/counter/acyclical fiscal stance based on a loss measure. The foreign exchange interventions distinguish between a managed and flexible exchange rate regime, while fiscal policy cyclicality depends on the oil output response of public consumption and public investment. The study reveals that the best policy combination is a countercyclical fiscal stance and consumer price monetary targeting under a managed exchange rate regime to stabilize the domestic price inflation, aggregate output, and real exchange rate in a small open economy.

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.

Deregulation, Liberalization and Evolution of Monetary Policy in India

In a developing country the monetary policy performs the role of not only stabilizing prices but also supporting growth. With deregulation and liberalization, the challenges faced by the monetary authorities have exacerbated. In India too the wave of deregulation and international integration of the financial markets and real sector has rendered the traditional monetary policy approach inappropriate. It has led to the evolution of a broad based and a forward looking monetary policy. The paper discusses the rationale and changes in the monetary policy framework in India namely, from the 'Monetary Targeting approach' to the 'Augmented Multiple Indicators Approach'.

ANALISIS MEKANISME TRANSMISI KEBIJAKAN MONETER JALUR NILAI TUKAR DENGAN PENDEKATAN VECM PERIODE 2005:1-2012:12

This thesis discusses about analysis of transmission mechanism of monetary policy through exchange rate channel in Indonesia, during the period 2005:1 - 2012:12. By using variables such as PUAB Interest Rate, Exchange Rate, Total Export, National Income and Price lndex. The method's try to used in this thesis is a method of Vector Error Correction Models (VECM). This research aims to know the effectiveness of transmission mechanism of monetary policy through exchange rate channel within respect to see the influence of the operational targets (PUAB Interest Rate) to the intermediary target (Exchange Rate), as well as the final goals of monetary target (national income and price level). 
 The results of this research show the transmission mechanism of monetary policy through exchange rate channel path deserves to be researched further, it is based on the significant value of the t-test, f-test, and Adj R2. Meanwhile, the results of the analysis of the "Impulse Response" found that the influence of shock caused by PUAB Interest Rate will cause the depreciation of Exchange Rate and also increasing of total export, we can visible to see the direct mechanism from Interest Rate to Exchange Rate (monetary sector) and after that transmitted to the real sector through the Total Export. As seen from the analysis of Variance Decomposition can be stated that during the period 2005:1-2012:12, the National Income variance contribution donated by Total Export and Exchange Rate, While Price Level variance contribution rate donated by Exchange Rate and PUAB Interest Rate

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.

Transmission mechanism of monetary policy in India - An Expost Study

The transmission mechanism of monetary policy is correlated to lending which expands aggregate demand in the economy. The banking system form an important place in the monetary policy transmission. The channels of monetary policy transmission are: Interest Rate Channel, Credit or Loan Supply Channel, Exchange Rate Channel, and Asset Price Channel. The financial prices include interest rates, exchange rates, yields, asset prices, and equity prices, and the financial quantities consists of money supply, credit aggregates, supply of government bonds and foreign denominated assets. RBI uses various monetary policy frameworks over the years which is classified as pre-monetary targeting (1947 to 1984-85), monetary targeting (1984-85 to 1997- 98), Multiple Indicators approach (1998-99 to 2014), Inflation Targeting (from 2013 onwards), and Flexible Inflation Targeting (FIT). MCLR also drastically decreased for all these banks from 2019 to 2021. The external benchmark has increased for the three types of banks from 2019 to 2021. The repo rate gives a contrast data between pre and post FIT periods. The financial system is not fully developed which is a hindrance to the transmission mechanism. The cost of lending, issues in bond market, and pandemic situation related problems requires an appropriate transmission mechanism in the monetary policy of our country.

РЕЖИМ ВАЛЮТНОГО КУРСУ ЯК ОБ’ЄКТ РЕГУЛЯТОРНОЇ ПОЛІТИКИ ДЕРЖАВИ В УМОВАХ ВІДКРИТОСТІ НАЦІОНАЛЬНОЇ ЕКОНОМІКИ

The article summarizes the patterns of development of exchange rate policy in Ukraine as the transition from administrative to economic methods of regulating the foreign exchange market in the process of increasing the degree of its liberalization. It is shown that the evolution of the exchange rate regime is described by the following chain: fixed, currency corridor, flexible, adjustable-floating, floating. The change in the objects of monetary targeting took place in the following sequence: credit channel, monetary aggregates, exchange rate, inflation. The main task of the NBU's exchange rate policy is to ensure price stability, and an additional one is the impact on the hryvnia exchange rate. It is determined that currently the main instrument of the NBU's monetary policy is the interest rate, and foreign exchange interventions are ancillary to the inflation targeting and floating exchange rate, which acts as a compensator for negative foreign exchange shocks and supports the competitiveness of producers. It is shown that within the current exchange rate regime in Ukraine foreign exchange interventions are carried out on the principles of reducing the role, scale and frequency as the currency market is liberalized, non-interference in its fundamental trends, priority of foreign exchange demand by foreign exchange market participants. and transparency of the criteria for the participation of entities in auctions and bidding. It is argued that the purpose of foreign exchange interventions is: replenishment of official foreign exchange reserves, smoothing the shortcomings of the foreign exchange market in case of its limited ability to self-regulate, loss of benchmarks for pricing, high exchange rate volatility, which negatively affects the currency security of the state and businesses. It is established that between foreign exchange interventions and the interest rate there is a transmission mechanism to strengthen the main instrument in regulating the foreign exchange and monetary markets on the principles of effectiveness of its consequences for the economy in case of adequate perception of NBU signals.

Monetary policy regimes: A global assessment

AbstractAn eight‐region, stochastic, general equilibrium model that incorporates global money and financial markets is used, first, to identify the distributions of regional supply side shocks in 1954–2016 from real GDP data. Second, in Monte Carlo simulations, the model is subjected to random draws from these distributions in all regions simultaneously, under a range of combinations of monetary targets. These experiments begin with a comparison of the volatilities of output and welfare (defined as the purchasing power of disposable income at regional prices) under current de facto and de jure monetary targets. The results show that the de facto targets offer significant improvement. A further analysis of targeting games suggests that a Nash equilibrium on output risk is dominated by nominal GDP targeting, while the corresponding Nash equilibrium on welfare risk has predominant inflation targeting (IT). Notwithstanding IMF policy to convert developing country central banks to inflation targeting, a fallacy of composition is observed in the spread of IT internationally. This spread tends to raise the volatility of welfare in the established open economies.

Monetary policy objectives and economic outcomes: What can we learn from a wavelet‐based optimal control approach?

AbstractIt has recently been widely recognized that monetary policy objectives change through time as our understanding of monetary policy and its impact on the macroeconomy evolves. In recent years there has been an extensive review of the framework for monetary policy at major central banks around the world, given the practical problems that have been encountered with inflation targets. This paper is a contribution to this debate, in that the aim of this paper is to evaluate the consequences of adopting different monetary policy objectives in the U.S. macroeconomic policy setting. To accomplish this, we first decompose U.S. macroeconomic data using a time‐frequency domain technique, namely discrete wavelet analysis. We then model the behavior of the U.S. economy over each wavelet frequency range and use our estimated parameters to construct a tracking model. To illustrate the usefulness of this approach, we simulate jointly optimal fiscal and monetary policy with different short‐term monetary targets: an inflation target, a money growth target, an interest rate target, and a real economic growth target. The results show that the most effective monetary policy targets to achieve economic growth are either inflation targets or economic growth targets.

Testing the Validity of the Long Run Neutrality of Money in Nigeria

Abstract Research background: There is no consensus among scholars on the interaction effect between money supply, price, and wages despite various studies conducted to that effect. Purpose: This study investigates whether the neutrality of money assumption holds in the long run in Nigeria, using annual data from 1970 to 2018. Research methodology: The study utilized the Johansen cointegration test and the Vector Error Correction (VECM) approach for estimation. Results: The results from the Phillips curve model contradict the classical school of economics assumption that money is neutral in the long run. This implies that in the Nigerian economy, money is not neutral in the long run. The long run Fishers’ effect model shows that the coefficient of LOG (CPI) exhibits a negative sign and is statistically significant at a 5% significant level, thus contradicting the hypothesis which states that a one percent increase in consumer prices will lead to an increase in the rate of interest by one percent. The coefficient of nominal money supply indicates a negative sign and insignificant statistically on the interest rate. The Short-run estimated results showed that the coefficient of the error correction term ECM (–1) indicates a negative sign and is significant statistically in the Fishers’ effect model. The result shows the actual and equilibrium values are corrected with adjustment speeds equal to 31% yearly. Novelty: The study recommends that the Central Bank of Nigeria should ensure an effective implementation of monetary targeting measures in fine-tuning the economy and curbing inflationary pressures.

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.

Velocity of Money in Ethiopia

Velocity of money is an important instrument used to measure the monetary target and quality of monetary policy. Referencing the trends in the money velocity, mainly in the short term, will have a paramount effect in determining the trends in real money growth. This study investigates the main causes of money velocity in Ethiopia using time series data for the period 1974/75 to 2015/16. A regression with Bayesian estimation and nonparametric Locally Weighted Scatterplot Smoothing (LOWESS) methods were used to analyze the data. Variables such as credit, real interest rate, real exchange rate and real per capita income were included as potential determinants of money velocity. The findings of using non-parametric LOWESS methods show an upward trends in the velocity of money since 2002 and downward trends before 2002, indicating the existence’s of prudent monetary policy in Ethiopia after 2002. The result also shows a positive effect of real exchange rate and credit, whereas income per capita and real interest rates have a negative effect on velocity of money in Ethiopia. Hence, this paper recommends that, the policy to encourage sustainable economic growth and increase in interest rate would be beneficial to reduce velocity of money.

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.

The European Central Bank: the time is ripe for a major revision of its strategy

A revision of the European Central Bank's (ECB) strategy is urgently needed. For the new strategy, it is important to define the inflation target explicitly in symmetrical terms. Environmental policy objectives can in principle be reconciled with the ECB's mandate as long as they do not conflict with the objective of monetary stability. An essential element of any strategy is a heuristic that makes it relatively easy for the public to monitor whether monetary policy decisions are in line with the mandate. Among the possible heuristics, monetary targeting and the Taylor rule have to be ruled out while ‘inflation targeting’ offers a relatively simple navigation system for monetary policy discussions.

The Stability of Money Demand Function in Sri Lanka: A Bound Cointegration Approach

The importance of demand for money has become a prominent research topic in monetary economics due to its role in monetary policy formulation. This paper investigates empirically the determinants of money demand function in Sri Lanka over the period 1977-2019. This study estimates both short run and long run money demand function using monetary aggregates M1 and M2 based on time series data. The explanatory variables used in the study comprised with stability variables such as Inflation rate, exchange rate and Gross Domestic product, Opportunity cost variables such as short run interest rate and long term interest rate and other macroeconomic variables such as government expenditure, interest rate spread and economic crisis. Annual time series data has been taken to estimate eterminants of money demand. The estimates of the long run relationship is obtained by using bound cointegration technique and the vector error correction technique was used to estimate of the short run dynamics of the long run equation. Findings of the study confirmed real GDP, interest rate, government expenditure, inflation rate, interest rate spread and economic crisis has significant relationship with the money demand in Sri Lanka. According to the stability test, the empirical results show that the both M1 and M2 money demand functions are stable for the period 1977-2019. Results indicate that both M1 and M2 are suitable for the monetary policy formulation. Thus, Sri Lanka’s current practice of monetary targeting framework using broad money as an intermediate target is viable. This study provides the policy challenges that Sri Lankan economy meets to develop favorable macroeconomic environment in order to manage money demand for a sustainable growth.