Strict Targeting Research Articles

Inefficient shocks and optimal monetary policy

Real disturbances that lead to trade-offs between inflation and output gap stabilization have not been studied much in the context of monetary policy settings in emerging markets and developing economies (EMDEs). We identify market price support present in the agriculture sectors of the EMDEs as inefficient shocks that lead to such trade-offs. Using a three-sector new Keynesian dynamic stochastic general equilibrium model, we show trade-offs between core-inflation and output gap stabilization under discretionary and commitment policies. This result departs from the popular viewpoint, stating that the strict core-inflation targeting is an optimal monetary policy for EMDEs susceptible to relative price changes.

Inflation Targeting, Exchange Rate Distortion and Output Stabilisation A Case of Zimbabwe Disinflation

Inflation targeting (IT) is practised in many countries and the real effects of strict inflation targeting were investigated on several occasions and less on other variants of IT. The study investigates the effects of inflation targeting lite on output. In particular, the compatibility of inflation targeting lite with managed exchange rate regime on output stabilization. The inflation targeting regime, the operating environment and exchange rate regimes were reviewed for Zimbabwe. An ARDL model was adopted as the empirical strategy to investigate the compatibility problem and the real effects of IT lite. Modelling output as output gap, inflation targeting lite and the exchange rate regimes were found to be inconsistent with output stabilization. IT lite and exchange rate premium increased the output gap, however the interaction between IT lite and exchange rate premium had negative effects on output. These results hold for both the short run and long run. However, considering the official rate and parallel rate separately, parallel rate has a negative effect but its interaction with IT has positive effects. The study recommends that developing countries should consider the exchange rate systems before the adoption of IT as a monetary policy framework. A floating exchange rate seemed to be compatible with IT lite.

When means‐testing meets work‐testing: A multi‐level institutional analysis of claiming in‐work benefits in Hong Kong

AbstractWhile there is a growing body of literature on the lived experiences of people in poverty, their interaction with the welfare delivery system at different levels is still under‐theorised. This article presents a multi‐level institutional framework to qualitatively study the low‐income families' experiences in claiming in‐work benefits (IWBs). Considering the Low‐income Working Family Allowance (LIFA) in Hong Kong as an extreme case of IWB's residualism and productivism, the findings suggest that LIFA claimants faced cycles of counter‐productive re‐assessment in their everyday frontline practices, and underwent organisational barriers in workplaces and families in collecting the proofs required by the means‐testing and work‐testing procedures. These experiences were linked to Hong Kong's macro‐systemic contexts that prioritised long working hours and strict targeting of low‐wage breadwinners. This study contributes to the literature by linking social policy implementation and welfare delivery to claiming experiences, and empirically reveals the complexities of IWBs using means‐tests and work‐tests.

The Role of Money in Monetary Policy at the Lower Bound

AbstractIn light of the current low‐interest‐rate environment, we reconsider the merits of strict money growth targeting (MGT) relative to conventional inflation targeting (IT) and to price level targeting (PLT). We evaluate these policies in terms of social welfare through the lens of a New Keynesian model and accounting for a zero lower bound (ZLB) constraint on the nominal interest rate. Although MGT makes monetary policy vulnerable to money demand shocks, MGT contributes to achieving price level stationarity and significantly reduces the incidence and severity of the ZLB relative to both IT and PLT. Furthermore, MGT lessens the need for fiscal expansions to supplement monetary policy in fighting recessions.

S-41-5: NEW INSIGHTS INTO THE OPTIMAL ANTIHYPERTENSIVE THERAPY IN CKD PATIENTS

Chronic kidney disease (CKD) is defined as continuous existence of reduced renal function, estimated glomerular filtration rate (eGFR) < 60 mL/min/1.73m2, and/or proteinuria including microalbuminuria. CKD patients are not only prone to progress to renal failure but also at high risk for developing cardiovascular diseases (CVD) as the concept of cardio-renal syndrome is assumed. As the cause of CKD, diabetic kidney disease and nephrosclerosis are dominating and their progression is promoted by aging and lifestyle-related diseases (LSD) such as hypertension and diabetes. Therefore, in order to maximally prevent renal failure and CVD in CKD patients, aggressive intervention achieving strict control of LSD starting at its earliest stage is important. Renal function is generally evaluated by eGFR, however, the fundamental aspect of renal function is renal blood flow or renal plasma flow (RPF), and the decrease of RPF is compensated by the increase in filtration fraction yielding the maintenance of GFR value. Accordingly, if eGFR is less than 60, it should be recognized that the extent of renal injury is not mild but moderate or worse. However, the measurement of RPF requires laborious and invasive procedure. Albuminuria may reflect the increase in glomerular capillary pressure (glomerular hypertension) elicited by reduced nephron number but the urinary albumin excretion is highly variable and is not necessarily parallel to the degree of renal injury. Among LSD, hypertension plays a pivotal role as the risk factor for renal failure and CVD, and the strict blood pressure control targeting < 130/80mmHg is recommended in the guidelines. As antihypertensive agents, renin-angiotensin system inhibitors such as ARB and ACE inhibitors are preferred because of dilating the efferent arterioles resulting in the alleviation of glomerular hypertension and the reduction in albuminuria. Calcium channel blockers have advantage in preserving RPF and GFR by dilating the afferent arterioles. In addition, recent randomized controlled trials have demonstrated that sodium-glucose cotransporter 2 inhibitors retard the GFR decrease in diabetic and non-diabetic CKD patients. Angiotensin receptor neprilysin inhibitor, now used for hypertension, has also been shown to reduce the risks of GFR decrease and worsening of renal function in heart failure patients. Nonsteroidal mineralocorticoid receptor antagonists are expected to provide renoprotective effects such as albuminuria reduction with affordable risk of hyperkalemia. Thus, in future strategy of antihypertensive therapy for CKD aiming maximum renal and cardiovascular protection, practical evaluation of renal injuries at early stages and incorporation of drugs with new evidence are the key issues.

Optimal monetary policy under currency mismatches in imperfect financial market

There is a large body of evidence documenting that many emerging market economies are subject to external financial shocks. We propose a two-country Dynamic General Equilibrium Model(DSGE) with three market imperfections: currency mismatches, moral hazard in banking and dominant currency pricing. Building upon Aoki, Benigno and Kiyotaki (2020) and Akinci, Queralto (2020), we analyze the optimal monetary policy in response to foreign interest rate shocks under the presence of the frictions. The results show that foreign monetary policy tightening leads to sharper local currency depreciation when import and export prices are set in the dominant currency compared to producer currency pricing. The optimal policy response to the foreign interest rate hike is a foreign exchange (FX) intervention with relatively strict inflation targeting. Macroprudential measures offer a modest macroeconomic and financial stabilization effect. We also conclude that domestically-produced goods inflation targeting alone is the worst monetary approach in EMs that attribute several real economy and financial imperfections. Nevertheless, allowing for integration of different monetary tools as well as introduction of FX hedging would be an interesting extension of our analysis.

Monetary-fiscal coordination: when, why and how?

PurposeThis paper aims to revisit the theme of fiscal-monetary coordination in a general equilibrium setup that allows for unconventional monetary policy, monetary policy transmission and developing country characteristics.Design/methodology/approachThis paper uses a calibrated new Keynesian dynamic stochastic general equilibrium (DSGE) model to study fiscal-monetary interaction.FindingsDebt sits at the center of monetary-fiscal interaction. Under high-debt conditions, the inflation-output trade-off rises with an increase in the strictness with which monetary policy targets inflation, undermining the standard prescription of strict inflation targeting. At the same time, the transmission of monetary policy is also impeded, due to which unconventional monetary policy becomes more appropriate. The need for coordination among the policies gets enhanced in the presence of borrowing cost channel. While the presence of borrowing cost channel increases the need for policy coordination regardless of the debt situation, features like higher share of non-Ricardian households and weaker monetary policy transmission affect monetary-fiscal interaction to a greater extent under high-debt environment.Originality/valueFirst, this paper uses inflation-output trade-off as a metric, to analyze fiscal-monetary interaction. Second, this paper considers the impact of developing country characteristics (such as a higher share of non-Ricardian households, impeded monetary policy transmission and supply constraints/borrowing cost channel) on fiscal-monetary interaction. Third, the DSGE model developed in this paper incorporates open market operations that could shed light on the role of unconventional monetary policy in the presence of high fiscal deficit and debt, which is particularly relevant in the current context of the COVID-19 pandemic. Fourth, the model also permits an investigation into monetary policy transmission under different debt regimes.

Minimum income in the Western Balkans: From socialism to the European Pillar of Social Rights

AbstractIn this article, we examine the evolution of minimum income programmes in the Western Balkans (comprising Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia). During socialism, Yugoslavia developed a rudimentary minimum income protection programme, while Albania did not have one. As countries moved towards a market economy, socialism's legacy remained relevant, but especially since 2000, governments have taken more direct responsibility for the minimum income schemes—typically under the influence of the World Bank. The attention was paid to strict targeting accuracy rather than to adequacy or sufficient coverage of the lowest deciles. In essence, neither socialist nor neoliberal policymakers ever recognised anything but the poverty relief function of the minimum income. Both ideologies were hostile, or at best indifferent, to increasing the adequacy and generosity of minimum income programmes, perceiving them as impediments and distractions that slowed socialist and neoliberal transformations. Despite some reform initiatives supported by the World Bank and, more recently, the European Union, the generosity and adequacy of minimum income programmes remain low, and coverage keeps declining. There have been very few efforts to develop inclusion function of the minimum income, while the activation aspect has achieved very little, sometimes degrading into punitive programmes of unpaid community work. In this dismal picture, the European Pillar of Social Rights action framework could serve as a guide for a long overdue third phase in the Western Balkans' minimum income policy evolution.

On the use of current and forward-looking data in monetary policy: a behavioural macroeconomic approach

Abstract We analyse the question of whether the use of forward-looking data in monetary policy is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that in a strict inflation targeting (SIT) regime, the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime, because the first regime creates more extreme movements in output and inflation than the second one. We also find that nowcasting tends to improve the quality of monetary policy, especially in a SIT regime. Finally, we provide a case study of monetary policies in the USA and the eurozone during 2000–20.

Monetary Policy, Inflation, and Rational Asset Price Bubbles

AbstractInflation has tended to be moderate during stock market booms in many countries. To explain the pattern and study optimal monetary policy in such a situation, this paper develops a dynamic model with rational bubbles and nominal rigidities. The model features a financial cost channel through which the shadow cost of borrowing affects marginal costs. A bubble‐led boom mitigates firms' borrowing constraints and keeps inflation from rising by decreasing the shadow cost. In this situation, Ramsey‐optimal monetary policy calls for tightening to curb the boom. Strict inflation targeting is counterproductive in the short run as it exacerbates the boom. For obtaining these results, the financial cost channel and nominal wage rigidity are essential.

Hysteresis in the New Keynesian three equation model

This paper introduces unemployment hysteresis into a tractable New Keynesian three equation model using an insider-outsider labour market. We demonstrate that strict inflation targeting can lead to a unit root in the unemployment rate, but dual mandate monetary policy can stabilise the economy around its efficient employment rate.

On the Use of Current or Forward-Looking Data in Monetary Policy: A Behavioural Macroeconomic Approach

We analyse the use of current and forward-looking data in the setting of monetary policy (Taylor rule). We answer the question of whether the use of forward-looking data is to be preferred over the use of current data. We use a behavioural macroeconomic model that generates periods of tranquillity alternating with crisis periods characterized by fat tails in the distribution of output gap. We find that the answer to our question depends on the nature of the monetary policy regime. In general, in a strict inflation targeting regime the use of forward-looking data leads to a lower quality of monetary policymaking than in a dual mandate monetary policy regime. Finally, nowcasting tends to improve the quality of monetary policy especially in a strict inflation targeting regime.

Output hysteresis and optimal monetary policy

We derive a fully quadratic approximation to welfare under endogenous growth and study optimal monetary policy. Away from the ZLB, optimal commitment policy sets interest rates to eliminate output hysteresis. A strict inflation targeting rule implements the optimal policy. At the ZLB, strict inflation targeting is sub-optimal and admits output hysteresis, defined as a permanent loss in potential output. A new policy rule that targets output hysteresis returns the output to the pre-shock trend and approximates the welfare gains under optimal commitment policy. A central bank unable to commit to future policy actions suffers from hysteresis bias: it does not offset past losses in potential output.

Nominal GDP targeting, real economic activity and inflation stabilization in a new Keynesian framework

This paper examines a nominal GDP growth targeting (NGDP-GT) rule, two Taylor types of rules and a strict inflation targeting regime in a New Keynesian model with the assumption of a positive rate of trend inflation. The model adopts a trend total factor productivity (TFP) growth to compare monetary policies in both high and low growth environments. Policy rankings are affected by the level of trend growth, the level of partial indexation to inflation and different specifications of the Taylor rule. NGDP-GT either outperforms other regimes or is weakly dominated by a desirable policy. Specifically, from the stability perspective, NGDP-GT is preferred compared to a Taylor type of rule and a strict inflation targeting regime in stabilizing the economy. It reduces inflation volatility by 25% or more while performs almost as well in stabilizing output and consumption relative to the Taylor rule. It produces at least 27% less fluctuations in output and consumption, and is almost as well as inflation targeting in stabilizing inflation. From the welfare perspective, when the Taylor rule takes the simple form, inflation targeting is the least desirable framework and NGDP-GT is weakly dominated by the Taylor rule. The conclusions are not conditioning on the trend growth rate or the level of inflation indexation. However, if the Taylor rule takes the form that interest rate responds to deviations of inflation and output growth (TR-II), when a TFP shock hits the economy and trend growth rate A=1, TR-II generates of the least welfare loss and NGDP-GT performs almost as well. When trend growth rate A≠1, NGDP-GT is the most desirable policy regime. When the economy is subject to a markup shock, and A≥1 and (or) partial indexation to inflation η=1, TR-II dominates the other two regimes. For other cases, NGDP-GT is the desirable policy rule.

CENTRAL BANKS' RESPONSE TO INFLATION, OUTPUT GAP, AND EXCHANGE RATE IN NIGERIA AND SOUTH AFRICA

This study examines inflation targeting in Nigeria and South Africa, using fully modified least square to estimate a modified Taylor rule for the period 1970 to 2016. The study unravels evidence of a significant response of inflation and squared inflation to policy interest rates in South Africa, but not in Nigeria. Overall, South Africa�s central bank places much emphasis on inflation targeting in setting interest rates which Nigeria does not. Further, for South Africa, output gap is significant, while it is not significant for Nigeria. The study also reveals that exchange rate, openness to trade and international reserves play significant roles in central bank policy in both countries. In other words, there is need for central banks to adopt an eclectic approach, setting the monetary policy rule to adjust to any observed disequilibrium between output gap, inflation, exchange rate, foreign reserves and openness to trade. However, strict inflation targeting may not serve as an appropriate framework to address the crucial macroeconomic problems challenging these African economies. However, developing countries� central banks, such as in Nigeria and South Africa, often have weak financial, fiscal and monetary institutions, thus rendering the application of inflation targeting considerably difficult. In this regard, the degree of the triumph of inflation targeting significantly depends on executive capacity, and the political will and commitment on the part of the central banks. The central banks should therefore be flexible about inflation objectives/targets when confronted with more pressing macroeconomic problems that could be remedied using existing policy instruments. From the findings of this study, it can be seen that there is a need to adopt an eclectic approach to setting the monetary policy rule. It is important to set the interest rate to adjust to any observed disequilibrium between output gap, inflation, exchange rate, foreign reserves and openness to trade. In fact, strict inflation targeting may not be an appropriate framework to solve the key macroeconomic problems challenging these African economies, such as price instability, exchange rate stability and inclusive economic growth. Still, inflation targeting remains a relevant policy approach but may not be adequate in its capacity to deal with economic and financial crisis if deployed only.

Rare Disasters, the Natural Interest Rate and Monetary Policy

This paper evaluates the impact of rare disasters on the natural interest rate and macroeconomic conditions by simulating a nonlinear New-Keynesian model. The model is calibrated using data on natural disasters in OECD countries. From an ex-ante perspective, disaster risk behaves as a negative demand shock and lowers the natural rate and inflation, even if disasters hit only the supply side of the economy. These effects become larger and nonlinear if extreme natural disasters become more frequent, a scenario compatible with climate change projections. From an ex-post perspective, a disaster realization leads to temporarily higher natural rate and inflation if supply-side effects prevail. If agents' risk aversion increases temporarily, disasters may generate larger demand effects and lead to a lower natural rate and inflation. If supply-side effects dominate, the central bank could mitigate output losses at the cost of temporarily higher inflation in the short run. Conversely, under strict inflation targeting, inflation is stabilized at the cost of larger output losses.

Inflation Targeting and World Monetary Shocks: Evidence from Developing Economies

The paper assesses the co-movement of local and foreign interest rate for developing countries with a full-fledged inflation targeting framework during and after the 2008 financial crisis. A panel linear optimizing monetary model is estimated by the fixed effects with spatial correlation standard errors over quarterly span from Q12007 to Q2 2019. The results suggest that inflation targeters are highly vulnerable to external monetary shocks, even after years of notable efforts to de-dollarization and complete shift towards a full-fledged inflation targeting. From a regime evaluation prospective, the inflation targeters’ response to world monetary shocks is compared to that of a group of fixed exchange rate rule economies and managed exchange rate countries with other monetary regimes. The findings provide evidence that inflation targeting countries are not different in their interest rate response to world monetary shocks compared to non-inflation targeting countries’, and instead of having more flexibility, inflation targeters show stronger reaction to world monetary shocks. These results are found robust when generated out from different subsamples and under assumptions of strict and flexible inflation targeting and policy inertia. The findings indicate that adopting inflation targeting as a framework for monetary policy does not by itself support the overall macroperformance and independence of monetary policy or force continuing commitment to the inflation targeting conditions.

What do Latin American inflation targeters care about? A comparative Bayesian estimation of central bank preferences

This paper employs Bayesian estimation to uncover the central bank preferences of the five Latin American inflation targeting countries with floating exchange rates: Brazil, Chile, Colombia, Mexico, and Peru. The target weights of each country’s central bank loss function are estimated using a medium-scale small open economy New Keynesian model with imperfect exchange-rate pass-through under either complete or incomplete international asset markets. Bayesian model comparison selects: (i) unambiguously the complete markets model version; (ii) the model specification with explicit concern for real exchange rate stabilization, with the exception of Peru. Our results suggest that the central banks of Mexico and Peru are closest to following a strict inflation targeting regime, whereas Brazil, Chile, and Colombia also assign a sizeable weight to output gap and real exchange rate stabilization. Finally, the estimated preference weights for each central bank are shown to credibly reflect their legal mandates.

Optimal Monetary Policy with Staggered Wage and Price Contracts

Abstract We formulate an optimizing-agent model in which both labor and product markets exhibit monopolistic competition and staggered nominal contracts. The unconditional expectation of average household utility can be expressed in terms of the unconditional variances of the output gap, price inflation, and wage inflation. Monetary policy cannot achieve the Pareto-optimal equilibrium that would occur under completely flexible ­wages and prices; that is, the model exhibits a tradeoff in stabilizing the output gap, price inflation, and wage inflation. We characterize the optimal policy rule for reasonable calibrations of the model. We also find that strict price inflation targeting generates relatively large welfare losses, whereas several other simple policy rules perform nearly as well as the optimal rule. JEL Classification: E31; E32; E52

Inefficient Shocks and Optimal Monetary Policy

The importance of trade-offs between inflation and output gap stabilization for monetary policy evaluation is well known. Real disturbances in the economy which lead to such trade-offs, however, have not been studied much in the context of monetary policy setting in emerging market and developing economies (EMDEs). We identify market price support present in the agriculture sectors of the EMDEs as a real disturbance leading to such trade-offs. Using a three-sector NK-DSGE model built in Ghate, Gupta, Mallick (2018), featuring food procurement policy in the Indian economy, we derive welfare loss function and characterize optimal monetary policy under discretion and commitment. We show that under both discretionary and commitment policy, trade-offs exist between core-inflation and output gap stabilization, and between headline inflation and output gap stabilization. This result departs from the existing popular view that strict core-inflation targeting is the optimal monetary policy for developing countries susceptible to sectoral relative-price changes. We also compare the response of the economy to a positive procurement shock and a negative productivity shock under different monetary policy rules. It is observed that an optimal simple rule with sectoral terms of trade/ relative price gaps improves welfare outcomes significantly.