Inflation Targeting Strategy Research Articles

The Stability of M3 Money Demand and Monetary Growth Targets: The Case of South Africa

The main purpose of this article is to determine whether money should continue to play an important role in the formulation of monetary policy in South Africa, even though the monetary policy framework has recently changed to an inflation targeting strategy. Money can continue to play an important role in the formulation of an efficient monetary policy strategy as long as there is a stable money demand function and money contains useful information about future price changes. The paper presents empirical evidence of a constant and structurally stable M3 money demand function for South Africa over the period 1968-97. The analysis further shows that the non-constancies experienced during 1998-99 may only be temporary. Despite evidence of a stable M3 money demand function, the results indicate that M3 money provides little information about future price changes in South Africa and may therefore have lost its usefulness as a reliable indicator for monetary policy. The money stock is endogenous, with prices determining money through the stable M3 money demand function.

Consumer Inflation Expectations in Poland

Inflation expectations constitute a subject of particular contemporary interest to central banks, especially those pursuing a monetary policy based on a strategy of direct inflation targeting. Macroeconomic theory indicates that the transmission of monetary policy impulses bears a close relationship to properties of inflation expectations. Qualitative data on inflation expectations, as obtained from surveys, can be quantified with the use of probability or regression methods. This paper presents the results of two versions of the probability method, implemented in order to estimate numerical measures of Polish consumer inflation expectations, based on the monthly Ipsos-Demoskop survey. In addition, the unbiasedness and macroeconomic efficiency of Polish consumer inflation expectations are tested, as are the way in which these are formed. The pattern of responses to the survey question and quantified measures of Polish consumer inflation expectations are also compared with the respective findings for the euro area.

Optimal Discretionary Monetary Policy in the Open Economy: Choosing Between CPI and Domestic Inflation as Target Variables

In open economy, a choice can be made between two measures of inflation for use as a target variable: CPI inflation or domestic inflation. This paper considers flexible and strict inflation targeting strategies and explores the circumstances under which a domestic inflation target is preferred to a CPI inflation target. This is done from the perspectives of the central bank and society as a whole. The quantitative results of this paper indicate that under suitable conditions the temporal properties of stochastic disturbances are instrumental in determining which inflation target is preferred. The choice of target variable from society’s viewpoint coincides almost perfectly with the choice of the central bank if the utility of the representative household serves as the welfare criterion for society. If qualitative aspects matter in the choice inflation target, then the role of temporal properties of the stochastic disturbances becomes less prominent. Policy conclusions are drawn with the help of a forward-looking model for a small open economy. This model has proper micro-foundations and exhibits two important features. First, the degree of openness affects the parameters of the IS relation and, second, under domestic inflation targeting, the existence of a direct exchange rate channel in the Phillips Curve impairs the perfect stabilising properties of monetary policy in the presence of demand-side disturbances.

Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model

Successful descriptions of short-term nominal interest rates inertial behavior have frequently been obtained with small scale macro models in which a Central Banker minimizes a loss function embedding an argument labelled as interest rate smoothing. The rationale for this argument is not straightforward. Indeed, there has been a lively debate about it in the literature. In this paper we perform an empirical exercise to evaluate the relationship existing between private sector's rational expectations and interest rate gradualism. Our findings strongly support rational expectations as an element capable to remarkably reduce the importance of the interest rate smoothing weight in replicating the observed path of the federal funds rate. However, we find a predominance of adaptive expectations in shaping the paths of inflation ad output gap. Our results also suggest that the Fed has followed a Strict Inflation Targeting strategy under Greenspan's regime.

Inflation Targeting - the Holy Grail of Monetary Policy?

Inflation targeting is a statement about the objective of central bank policy and not about operating procedures. Its success depends not only on the actions of the central bank, but requires a broad consensus concerning the proper role of monetary policy in the economy. It also requires the backing of a sound fiscal policy. As countries differ both in economic structure and monetary transmission mechanism, the implementation of inflation targeting must be country specific. Instability over time in the transmission mechanism also implies that inflation targeting strategies must evolve to avoid the fate of previous monetary policy targeting practices.

Inflation targeting in poland (a comparison with the czech republic)

This paper deals with the implementation of the inflation targeting regime in Poland. The study contributes to the discussion about opportunities and constraints of inflation targeting in the more advanced transitive economies. This analysis of monetary policy issues is based on an econometric investigation of the Polish inflation time series and on the estimation of the links between monetary policy instruments and inflation. In comparison with the Czech Republic, the Polish inflation targeting strategy faces more obstacles and limitations that are caused by the structural characteristics of Polish inflation and the country's less advanced money market.

INFLATION TARGETING, DEVELOPING COUNTRIES AND PRELIMINIARY CONSIDERATIONS FOR TURKEY

The major objective of this paper is to analyze the applicability inflation targeting framework in Turkey. Moreover, the paper considers whether the prerequities for an effective inflation targeting strategy are present in developing countries. After discussing the implications of inflation targeting framework for Turkey, this article concludes that it would not be feasible for Turkey to adopt such a framework for monetary policy. turkey msut eliminate the fiscal roots of the inflation process and solve its public debt problem before adopting explicit inflation targeting. In addition, we examined the predictive content of various economic variables for inflation in order to determine the statistical readiness of Turkey to meet the requirements of inflation targeting. The empirical evidence presented in this paper suggest that the main factor behind the inflationary process is fiscal imbalances and that money supply shocks are not the driving forceof inflation in Turkey.

Transition to the Strategy of Inflation Targeting

The Czech National Bank entered 1998 with a new strategy regarding monetary policy based on inflation targeting, thus joining the growing number of central banks whose monetary policy concentrates directly on achieving and maintaining a lower inflation level, that is, without using an explicit intermediate goal. The newly announced strategy has generated interest in the professional as well as the daily press. The timeliness of this subject is reflected in the fact that an entire issue of the journal Finance a uver was devoted to inflation targeting. In this article we focus on five areas that we consider important regarding the transition to inflation targeting. The starting point for the new strategy is explained in the first section of this article. For an ongoing discussion about the orientation of monetary policy, it is obviously important to stress the difference between the benefits of inflation targeting and possible short-run impacts related to the specific short-run inflation target. Inflation targeting stems from a general consensus regard

The Stability of Emu‐wide Money Demand Functions and the Monetary Policy Strategy of the European Central Bank

In this paper we investigate whether monetary aggregates could play a role as either intermediate targets or indicators of the single monetary policy of the European Central Bank (ECB). To this end we estimate money demand functions for the European Economic and Monetary Union and test for their stability. Our estimations suggest that M3H in particular can play a role in both a monetary and an inflation targeting strategy. If the ECB chooses to opt for an inflation targeting strategy MR and even M1, in addition to M3H, may well serve as important indicators, alongside a number of other financial and real variables.

The Performance of Inflation Forecast Feedback Rules in Small Open Economies

This paper examines the performance of inflation forecast feedback rules in a two-sector, calibrated model of the U.K. economy. Under such rules, the interest rate responds to the deviation of the unchanged-interest-rate forecast of inflation from the inflation target. We find that this procedure may produce a high degree of nominal and real stability, even outperforming the optimal discretionary (flexible) inflation targeting strategy. In order to take adequate account of the exchange rate channel, the feedback horizon will need to be short. A feedback horizon of a year or more creates exchange rate volatility, resulting in higher variability in inflation and traded sector output.

Measuring inflation expectations: a survey data approach

Measures of expected inflation from consumer surveys are derived using a modification of the Carlson-Parkin probability approach, which does not assume unbiasedness of expectations, makes use of survey data on expected future as well as perceived past price developments and allows for time varying response thresholds. We apply this method to the normal, central-t and noncentral-t distributions, thereby investigating the effects of nonnormal peakedness and asymmetry. We find that the effects on expected inflation of the former are small and of the latter are substantial, without increasing the accuracy of the expectations, however. Expected and actual inflation show substantial persistence, and, for most of our expectations measures, are cointegrated. Furthermore, the forecast error is stationary, implying weak-form rationality. The co-movement of currently observed expected inflation measures and the unobserved 12-months-ahead inflation rate is of interest for policy makers, for example in the direct inflation targeting strategy. Notwithstanding this, caution is warranted in using them as information variables because the inflation expected by consumers is no causal determinant of actual future inflation.

Potential information and target variables for UK monetary policy

The relationship between traditional monetary policy goal variables (nominal GDP, real GPD and the inflation rate) and a number of financial market variables is investigated. The question examined is which if any of these financial market variables (monetary aggregates, interest rates and interest rate spreads) are potentially useful as either information variables or intermediate targets. While the implications concerning the usefulness of the financial variables considered are pessimistic concerning nominal GDP, more robust relationships are found for real GDP and inflation. The latter finding is of interest given the current UK monetary policy strategy of inflation targeting. Our results are, however, more supportive of the usefulness of several financial variables as information variables than as intermediate targets.

The European Central Bank and inflation targeting

The paper discusses the background to the European Central Bank's (the ECB's) choice of monetary strategy and goes on to consider in some detail the implications of an inflation targeting strategy in EMU. © 1998 John Wiley & Sons, Ltd.