Inflation Targeting Strategy Research Articles

THE IMPACT OF INFLATION TARGETING MONETARY POLICY ON MACROECONOMIC PERFORMANCE OF TURKEY DURING 2002-2022

The main aim of the study is to investigate the impact of inflation targeting (IT) strategy in Turkey during 2002-2022, which was adopted in a three-year period of 2002-2004, on macroeconomic performance (actual inflation, exchange and interest rates) and economic growth of Turkey (in terms of the real GDP). The econometric and empirical investigation of this research focusing on the impact of inflation targeting on the selected macroeconomic variables were carried out by the linear squares method (LSM) regression taking the data of the period after implementation of the monetary policy. At this, the independent variable of inflation targeting was estimated against each chosen macroeconomic variable separately in four different models to catch its linear impact on the changes of these variables over the period after implementation of the strategy. The empirical outcomes demonstrated that inflation targeting monetary policy is strong enough to impact the macroeconomic performance of Turkey in terms of reducing inflation rates, boosting economy by pushing real GDP to grow, stabilize exchange rates and lower the nominal interest rates on deposits.

Exchange Rate Regime Choices in Small Open Economies from Bretton Woods to Inflation Targeting

After centuries of metallic monies, for a long time, our understanding of fiat money had remained rudimentary and often controversial. Successive regimes eventually failed. The end of the Bretton Woods system marked the moment when the link between fiat money and gold was severed and when the possibility of letting exchange rates float became possible. The small open economies adopted various arrangements. Informed by these experiments, the understanding of monetary policy substantially progressed, leading to the widespread adoption of the expected inflation-targeting strategy with similar inflation targets. As a result, exchange rate variability has declined. The US dollar dominance was maintained and even increased. Yet, new challenges have emerged. The long period of interest rates stuck at the effective bound effectively suspended the use of the strategy. Then, during the post-pandemic surge in inflation rates, inflation forecasts became highly imprecise.

NEW EVIDENCE CONCERNING THE INEQUALITY – FINANCIAL DEVELOPMENT NEXUS IN ROMANIA. A COINTEGRATION APPROACH

This paper revisits the ambiguous effect of financial development on income inequality in emerging countries by investigating the presence of cointegration between concepts in Romania. Since financial deepening seems to be beneficial in the income-disparities fight in advanced countries, opposite findings are found in the case of less developed or transition ones. Therefore, we employ a time-series model that accounts for inequality, financial deepening and economic growth as the main variables spanning more than 30 years of Romanian history. On average, a higher degree of financial development harms income distribution in the long term, while economic productivity manifests a non-significant influence on inequality. These outcomes are robust to other novel measures of finance that account for the global dimension of financial development: financial institutions, markets and private sector credits. To control for the potential bias of inequality’s transmission channels, we include a proxy for inflation in our specification. By capturing the impact of financial expansion on inequality in the presence of inflationary pressure, our results reflect the sensitivity of the low-income groups to this phenomenon. In this regard, policymakers should pay attention to inflation-targeting strategies to support the condition of poor individuals who often cannot take advantage of the benefits of financial development.

Dynamics of the Relationship between Inflation and Interest Rates: Testing For the Fisher Hypothesis with Structural Break(S) and Parameter Stability

In the present study, the Fisher hypothesis that considers a one-to-one and unidirectional relationship between inflation and interest rates was tested using a quarterly frequency dataset for E-7 countries. Due to the fact that parameter constancy was not established in the study, Arai & Kurozumu and Kejriwal test techniques were used and it was found that Fisher effect was valid in weak and strong forms for country groups excluding Russia. At the same time, due to the fact that coefficient indicator modulus observed in slope parameters after structural changes had negative values, contractionary monetary policies in these economies where inflation targeting strategies were implemented resulted in weakening of the relationship between inflation and interest rate variables.

Interfuel Substitution and Inflation Dynamics in India

Abstract This paper uses neoclassical microeconomic theory to investigate the demand for energy and interfuel substitution in India at the sectoral level. It makes full use of the relevant economic theory and econometrics and generates inference in terms of Allen and Morishima elasticities of substitution that are internally consistent with the data and nonlinear models used. The results indicate that the interfuel substitution elasticities are consistently below unity in the household and power sectors, revealing the limited ability to substitute between major energy commodities in these two sectors. However, significant substitution relationships are found in the industrial and transportation sectors, suggesting that energy price changes in these sectors will significantly shift the demand for energy and consumption. Based on measured elasticities of substitution, we also discuss implications of energy price shocks on inflation and inflation targeting strategies by the central bank.

INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY

INTERRELATIONSHIP OF INFLATION, EXCHANGE RATE AND INTEREST RATES IN THE CONTEXT OF HUNGARY'S STRATEGIC POLICY

Deficit sustainability and fiscal theory of price level: the case of Italy, 1861–2020

We test sustainability of the Italian government deficit over the period 1861–2020 using the fiscal theory of the price level (FTPL). This approach takes into account monetary and fiscal policy interactions and assumes that fiscal policy may determine the price level even if monetary authorities pursue an inflation-targeting strategy. We consider a cointegrated model with multiple structural changes to characterize the sustainability of public finances and the prevalence of monetary or fiscal dominance during subperiods. We also use recursive unit root tests for explosiveness to test fiscal sustainability and to detect episodes of potential explosive behaviour in Italian public debt. We find two structural changes for the public debt and one change in the primary budget surplus, the alternation of monetary and fiscal dominant regimes, as well as evidence of bubbles related to three episodes of the Italian fiscal performance. Our results reveal the sensitiveness of the primary balance and the debt paths to shocks hitting fiscal, macroeconomic, and financial variables.

Examining the Impact of Global Trends Exposure on Inflation Targeting Strategies

Examining the Impact of Global Trends Exposure on Inflation Targeting Strategies

Flexible Average Inflation Targeting: How Much Is U.S. Monetary Policy Changing?

One major outcome of the Federal Reserve’s 2019–20 framework review was the adoption of a Flexible Average Inflation Targeting (FAIT) strategy in August 2020. Using synthetic control methods, we document that U.S. inflation rose post-FAIT considerably more than predicted had the strategy not changed (an average of 1.18 percentage points during 2020:M8–2022:M2). To explore the extent to which targeting average inflation delayed the Fed’s response and contributed to post-FAIT inflation, we adopt a version of the open-economy New Keynesian model in Martínez-García (2021) and document the economic consequences of adopting alternative measures of average inflation as policy objectives. We document three additional major findings using this general equilibrium setup: First, depending on how far back and how much weight is assigned to past inflation misses, the policy outcomes under FAIT are similar to those under the pre-FAIT regime. Secondly, we find that the implementation of FAIT can have large effects over short periods of time as it tends to delay action. However, over longer periods of time—such as the 1984:Q1–2019:Q4 pre-FAIT period—its effects wash out and appear negligible. Finally, we find that di˙erent average inflation measures explain an average of 0.5 percentage points per quarter of the post-FAIT inflation surge, indicating that targeting average inflation by itself can only explain part of the inflation spike since August 2020.

Is the ECB already following albeit implicitly an average inflation targeting strategy?

A fundamental aspect of the ECB's monetary policy strategy is that it aims to pursue price stability over the medium term. However, the ECB has not defined the medium term with reference to a predetermined horizon. To shed some light on how the horizon of price stability is being achieved in practice, we have estimated a regression where the ECB policy interest rate is expressed as function of a j-period centered moving average of inflation forecasts, which may capture the length of the medium-term horizon orientation of monetary policy. We have tested for different combinations of policy horizons, and forecast horizons, to achieve the best fit. Allowing j to vary from 1 year (corresponding the standard inflation targeting regime) to a normal length of an economic cycle, we keep the model sufficiently general, and we let the data speak for itself. We have found that the ECB is targeting price stability over a period in between four years and a half and five years, implying that the ECB is area1dy following, albeit implicitly, a hybrid approach to price stability in line with average inflation target. This result is robust when we control for the Central Bank desire to avoid excessive policy interest rate variability due to the presence of policy interest rate adjustment costs.

Impact of the base rate on the inflation response of the economy

The purpose of the article is to consider the impact of macroeconomic factors on the economic development of the country, to give an assessment and recommendations for improving the effectiveness of monetary policy in order to stabilize and achieve the goals of the inflation targeting strategy. Recently, we can observe a sharp increase in prices for socially important products, which directly indicates an increase in inflation in a country where the main institution responsible for curbing inflation is the Central Bank, whose strategy is aimed at ensuring price stability and implementing an inflation targeting regime. The main reason making it difficult to implement an inflation targeting strategy is the economic crisis caused by the coronavirus (COVID-19), which has bowed central banks around the world to new challenges. The first indicators of the crisis in many countries were production stoppages, sales curtailments and border closures. In particular, in Kazakhstan, this crisis had a strong impact on the economic state of the country, namely on the pricing of imported and domestic goods. The paper puts forward the hypothesis that the current monetary policy requires rethinking from the position of transformation of interest rate regulation policy. In order to substantiate this, a comparative analysis of the effectiveness and impact of the interest rate on inflationary shocks on the basis of officially published data was conducted. The role of the TONIA indicator in inflation management was determined and its changes were analyzed. The paper focuses on the analysis of interest rate impact on household deposits and loans, pricing and foreign trade turnover of Kazakhstan, which made it possible to develop recommendations.

Do words transform into actions? The consistency of central banks? communications and decisions

Research background: This study investigates central banks? (CB) intentions as reflected in their minutes and their relationship with policy decisions. Although CB communication is an inherent part of their inflation targeting (IT) strategy, their communication does not necessarily result in actions. Purpose of the article: This study aims to extract policy intentions from central bank minutes and juxtapose these with actual policy decisions to investigate the consistency of their words and deeds in a comparative context. Additionally, we compare the applicability of three dictionaries in policy communication assessments. Methods: Computational linguistics and textual methods are applied to create proxies for tone from a large dataset of texts. A transformation of words into time series involves the application of a general economic dictionary and two monetary policy-adjusted dictionaries. We examine the association between tone and actual CB decisions with the eta squared coefficient. The research covers 15 European CBs, divided into three subgroups according to the CB experience in inflation targeting. The sample starting points differ as they relate to each country?s IT implementation year; the analysis ends in mid-2019. Findings & value added: This paper?s value added is firstly methodological, as we test three dictionaries to determine their usefulness. Statistical and qualitative analysis allows us to conclude about superiority of monetary policy specific lexicons for this kind of studies. The extra value added is about the study?s coverage: it covers a large sample and provides a broader illustration compared to most previous examinations. Our results suggest that a relationship exists between communications and actions, although the weakest for late joiners to IT. The latter group of CBs needs to strengthen communication practices. In experienced inflation targeters the short run dimension of credibility exists and opens the room for creating effective monetary policy in terms of managing the expectations of a general audience.

The Macroeconomic Determinants of Economic Growth in Uganda (1990–2019)

The study was based on Macroeconomic Determinants of Economic Growth in Uganda using cointegration approach. The researcher used statistical software of Eviews 11 student version for the analysis of the macroeconomic variables affecting Uganda’s economic growth. The main objective of this study was to examine the major macroeconomic determinants of economic growth in Uganda between the periods 1990 and 2019 applying the Johansen method of cointegration. All the variables are integrated at first order except real effective exchange rate as a result the Johansen's cointegration approach was used. The study found out that foreign direct investment (% of GDP), inflation (consumer prices) and real interest rate had a positive effect on growth in real gross domestic product per capita while real effective exchange rate has a negative effect on per capita growth in gross domestic product. In the long run, real effective exchange rate and real interest rate are the significant determinants of growth in real gross domestic product per capita in Uganda. In the short run, inflation (consumer prices) and real interest rate turned to be statistically significant determinants of growth in real gross domestic product per capita. Based on the findings, the following policy recommendations are made: The Bank of Uganda should make use of monetary policy to stimulate the economy through increased aggregate demand due to the positive relationship between inflation and gross domestic product per capita growth. Since there is a positive relationship between FDI and gross domestic product per capita growth, it is therefore recommendable that the government of Uganda continues to attract more international capital inflow through trade liberalization if it is to achieve its growth target of 8 percent growth rate per annum. However the most important policy implication from the findings of negative relationship between economic growth and exchange rate indicates that there is a need for exchange rate policy framework that compliments the existing inflation targeting regime in Uganda. Instead of completely liberalizing the exchange rate in the framework of inflation targeting strategy adopted, policymakers in Uganda have to prevent the upside movements in the exchange rate by taking into consideration its negative effect on economic growth.

Has Inflation Targeting Strategy Made A Difference in Ghanaian Macroeconomic Management? Analysis of Business Cycle Fluctuations and Econometric Estimates

For over a decade of practicing inflation targeting (IT) strategy, inflation has remained high and persistent while economic growth momentum has boosted in Ghana. This paper investigates the relative macroeconomic benefits of the IT strategy in Ghana based on business cycle fluctuations and several standard econometric techniques that capture other salient macroeconomic events and/or disasters. The basic empirical finding is that the IT strategy has generally improved the macroeconomic management in Ghana by reducing average inflation rate, boosting average growth rate and dampening the cyclical oscillations in both output and inflation. We however find a slower pace of disinflation in Ghana, underpinning the high inflation inertia and backward-looking inflation expectation formation. The gradual disinflation process is an attestation that the monetary authority in Ghana has been practicing flexible rather than stringent IT strategy in the midst of frequent shock-side shocks, weak policy transmission (due to protracted transmission lags) and continuous fiscal surprises which create additional source of concerns that the central bank finds it cumbersome to ignore. The central bank of Ghana can improve its policy credibility and hence sharp agents’ inflation expectation by enhancing policy communication and acknowledging that it does not focus solely on the inflation target but is also watchful of short-run trade-offs between inflation and output (and employment).

Distributional Considerations for Monetary Policy Strategy

We show that makeup strategies, such as average inflation targeting and price-level targeting, can be more effective than a flexible inflationtargeting strategy in overcoming the obstacles created by the effective lower bound in a heterogeneous agent New Keynesian (HANK) model. We also show that the macroeconomic stabilization benefits from such alternative strategies can be substantially larger in a HANK environment than in a representative agent New Keynesian model. We argue that gains in employment outcomes from switching to an alternative strategy would generate disproportionate improvements for historically disadvantaged households and thus have potentially long-lasting effects on the economic well-being of these groups.

Oil-food price dynamics in an oil-dependent emerging economy

PurposeThis paper aims to examine the transmission from oil price to local food price returns in Nigeria from January 1995 to May 2019.Design/methodology/approachTo circumvent erratic behaviours and account for possibilities of noises at the edge of the wavelet signals, the paper combines wavelet and Markov-switching techniques to determine the significance and magnitude of oil–food price dynamics across different time scales.FindingsIt is shown that oil to food price pass-through changed across frequencies. Notably, results reveal a swift pass-through which signals the dominance of the direct effect of oil price shocks on food prices with evidence of weak spillover in the short term. The medium- and long-term horizons witness the dominance of the indirect effect of oil price shocks with much sluggish transmission to food prices; the highest significant pass-through of about 4% are also observed when the oil price is denominated in the naira–USD exchange rate.Originality/valueThe study improves understanding of the relationship between oil price shocks and domestic food price returns. It shapes policy prescription on appropriate inflation targeting strategies of monetary authorities.

Bayesian combined forecasts and Monte Carlo simulations to improve inflation rate predictions in Romania

In this paper we applied the regression approach and Bayesian inference to obtain more accurate forecasts of the inflation rate in the case of the Romanian economy. The necessity of using the most accurate forecasts for the inflation rate is required by the realisation of economic criteria for the accession to the eurozone and by the inflation targeting strategy of the National Bank of Romania. Considering the assumption that simple econometric models provide better forecasts than complex models, in this paper we combined various forecasts from individual models using as prior information the expectations of experts. The empirical findings for Romanian inflation rate forecasts over the horizon of 2016-2018 indicated that a fixed effects model performed better than other simple models (autoregressive moving average model, dynamic model, simple and multiple linear model, VAR, Bayesian VAR, simultaneous equations model). The Bayesian combined forecasts that used experts’ predictions as priors, with a shrinkage parameter tending to infinity, improved the accuracy of all predictions using individual models, outperforming also naive forecasts and zero and equal weights forecasts. However, predictions based on Monte Carlo simulation outperformed all the scenarios in terms of the mean error and mean absolute error.

Development of Inflation Expectations in Serbia and a Comparative Analysis

Abstract Inflation expectations are very important when it comes to monetary policy and its decisions. In countries which are applying inflation targeting, inflation expectations reflect prediction of economic agents of movement of inflation rate in mid and long term. Anchored inflation expectations and their movements within target tolerance band are pointing to effectiveness of the inflation targeting strategy. Consistent with the best international practice, after introducing the inflation targeting regime in January 2009, the National Bank of Serbia began monitoring and analysing inflation expectations of economic agents (financial sector, corporate sector, trade unions, and households). The aim of this paper is to analyse inflation expectations in Serbia, but also to give a comparative analysis of inflation expectation of other countries which are using inflation targeting and floating exchange rate, as is the case of the National Bank of Serbia.

Türkiye’de Para Politikası Tepki Fonksiyonu: Fourier Temelli Zaman Serisi Yöntemlerinden Bulgular

The Central Bank of the Republic of Turkey (CBRT), which adopted an inflation targeting strategy in 2006, has thus far typically missed the inflation target. Therefore, this paper focuses on the monetary policy reaction function of the CBRT to detect the economic indicators that the CBRT considers while it is adjusting short-term interest rates. Put differently, the goal of this paper is to estimate a forward-looking monetary policy reaction function for the CBRT. To that end, the paper uses monthly data over the period 2006:1-2019:5. Differing from the previous papers in the empirical literature, this paper considers recent developments in time series analysis and employs time series methods based on the Fourier approximation to capture structural breaks. These methods are capable of presenting efficient and unbiased results in the presence of both sharp and gradual breaks. The findings indicate that the CBRT considers only inflation while it is steering short-term interest rates.

Theoretical and Practical Foundations of Inflation Targeting with Special Emphasis on the Experience of Serbia

Compared to the 1970s when the inflation rate in most countries reached double digits, nowadays we are facing low inflation rates globally. Inflation targeting, as a monetary policy strategy, appeared in late 1980s in the period when other strategies proved to be insufficiently effective. The first country to apply inflation targeting strategy in 1989 was New Zealand. Since then, 64 countries[1] have implemented the inflation targeting. The concept of inflation targeting as a strategy for conducting monetary policy in Serbia was introduced in August 2006. When choosing the appropriate strategy to ensure price stability, the NBS relies on the experiences of other countries, especially Central and Eastern European countries. Accordingly, the paper aims to present the genesis of the development of the inflation targeting strategy, as well as the impact of applying this strategy on reducing global inflation. A special segment of this paper is devoted to the analysis of the experiences of Serbia in terms of applying the inflation targeting strategy.