Success Of Inflation Targeting Research Articles

The BSP’s journey towards a progressive monetary policy framework

This paper examines the evolution of monetary policy framework in the country. It starts the journey with the establishment of the central bank after the Second World War, when there was still no active monetary policy as the country operated on a fixed exchange rate system and supply-led credit programs. The paper describes the challenges with the implementation of monetary policy reforms in the 1980s, particularly the shift to a “managed float” exchange rate system and the adoption of monetary aggregate targeting framework in the context of deregulation and liberalization. It further discusses the development of monetary policy framework and operations, following the creation of an independent Bangko Sentral ng Pilipinas (BSP) in 1993, with the primary mandate of maintaining price stability. It provides a narrative on how the monetary aggregate targeting framework was modified to its eventual shift to an inflation targeting (IT) framework. It highlights the relative success of IT and discusses the innovative approaches undertaken by the BSP to further enhance liquidity management. Moving forward, the BSP’s monetary policy framework and operations will likely continue evolving and serving as steady anchors of macroeconomic stabilization. This will be guided by foresight, commitment to action and helpful lessons from the past, in the context of increased uncertainty.

Exchange rate volatility and pass‐through to inflation in South Africa

AbstractDoes the South African rand's relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass‐through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation's successful inflation targeting regime.

The Impact of Inflation Targeting on Inflation and Growth: How Robust is the Evidence?

This paper evaluates the success of Inflation Targeting on inflation and growth on a large panel data set of both developing and developed countries. Earlier studies have found contradictory results depending on the methodology used, different authors have used different estimation methods on different samples of data. Some of the differences in results may also be due to the different time periods (or different frequencies of data) used in the estimation. In this paper, we provide evidence to show that the support for a successful Inflation Targeting policy is very weak or non-existent. We use various estimation methods on panel data on a large sample of countries. We note that the results depend critically on the sample selected, the method of estimation employed, and the procedure used to control for outliers. Section 2 of the paper outlines the process by which inflation targeting is hypothesised to influence inflation and growth, Section 3 surveys this literature, and Section 4 describes the data and provides descriptive statistics comparing the performance of Inflation Targeting countries and non-Inflation Targeting countries, Section 5 uses panel estimation methods including GMM techniques on different samples of data and demonstrates the fragile nature of the results. Section 6 provides the conclusions that suggest that IT policy does not necessarily help to reduce inflation and certainly does not stimulate economic growth.

Exchange Rate Volatility and Pass-Through to Inflation in South Africa

Does the South African rand’s relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass-through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation’s successful inflation targeting regime.

Exchange Rate Volatility and Pass-Through to Inflation in South Africa

Does the South African rand’s relatively large volatility affect inflation? To shed some light on this question, a standard estimation technique of exchange rate pass-through to inflation is extended to incorporate exchange rate volatility. Estimated results suggest that higher exchange rate volatility tends to increase core inflation but to a relatively limited extent in South Africa. The finding lends support to the policy of allowing the rand to float freely and work as a shock absorber, consistent with the nation’s successful inflation targeting regime.

THE PHILLIPS CURVE AND AN ASSUMED UNIQUE MACROECONOMIC EQUILIBRIUM IN HISTORICAL CONTEXT

An early post-WWII debate concerned the most desirable demand and inflationary pressures at which to run the economy. Context was provided by Keynesian theory devoid of a full employment equilibrium and containing its mainly forgotten, but still relevant, microeconomic underpinnings. A major input came with the estimates provided by the original Phillips curve. The debate seemed to be rendered obsolete by the curve’s expectations-augmented version with its natural rate of unemployment, and associated unique equilibrium GDP, as the only values consistent with stable inflation. The current behavior of economies with the successful inflation targeting is inconsistent with this natural-rate view, but is consistent with evolutionary theory in which economies have a wide range of GDP-compatible stable inflation. Now the early post-WWII debates are seen not to be as misguided as they appeared to be when economists came to accept the assumptions implicit in the expectations-augmented Phillips curve.

Keep Your Word: Time Varying Inflation Targets and Inflation Targeting Performance

This paper investigates the implicit inflation targets of inflation targeting (IT) CBs (CBs). This allows us to analyze whether the actions of the IT CBs coincide with their announced targets. The implicit (perceived) inflation targets of IT CBs derived from the actions (policy interest rates) are calculated before and after IT adoption. We construct a panel data set of implicit inflation targets to investigate the determinants of time-variation of inflation targets. We conclude that after adoption of IT implicit targets become significantly lower. Also, we identify the factors that cause CBs to change their implicit targets. Finally, we find that CBs that do not follow their announced targets miss their inflation targets. In other words, we identify one of the factors that causes IT CBs to miss their targets. Inflation targeting CBs should follow their announced targets when setting policy interest rates. This paper uncovers the dynamics behind time-variation in implicit inflation targets presented in several studies. The findings of this paper provides an explanation for the success of IT in especially developing countries. The empirical results deliver many policy implications especially for IT CBs.

Learning and heterogeneity in GDP and inflation forecasts

Using a Bayesian learning model with heterogeneity across agents, our study aims to identify the relative importance of alternative pathways through which professional forecasters disagree and reach consensus on the term structure of inflation and real GDP forecasts, resulting in different patterns of forecast accuracy. There are two primary sources of forecast disagreement in our model: differences in prior beliefs, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the US, and (ii) the successful inflation targeting experience of Italy after 1997, firmly establish the importance of these two pathways to expert disagreement, and help to explain the relative forecasting accuracy of these two macroeconomic variables.

In Search of Successful Inflation Targeting: Evidence From An Inflation Targeting Index

In a first attempt to treat inflation targeting (IT) as a continuous variable, we construct IT subindices for 21 full-fledged ITers on three dimensions: flexibility, transparency, and explicitness. Comparing flexibility and transparency we find that (1) the impact of flexibility on both the mean and variation of inflation is more quadratic than that of transparency; (2) after adding the transparency index, the impact of flexibility is no longer significant. The significant and negative association between transparency and the level and variation of inflation is confirmed when we check for robustness by controlling for disinflation stage, subsampling, instrumental variable estimation, and principal component analysis (PCA).

Monetary and exchange rate regimes changes: The cases of Poland, Czech Republic, Slovakia and Republic of Serbia

The paper explores (former) transition economies, Poland, Czech Republic, Slovakia and the Republic of Serbia, concerning abandonment of the exchange rate targeting and fixed exchange rate regimes and movement toward explicit/implicit inflation targeting and flexible exchange rate regimes. The paper identifies different subperiods concerning crucial monetary and exchange rate regimes, and tracks the changes of specific monetary transmission channels i.e. exchange rate channel, interest rate channel, indirect and direct influences to the exchange rate, with variance decomposition of VAR/VEC model. The empirical results indicate that Polish monetary strategy toward higher monetary and exchange rate flexibility has been performed smoothly, gradually and planned, compared to the Slovak and, especially, Czech case. The comparison of three former transition economies with the Serbian case indicate strong and persistent exchange rate pass-through, low interest rate pass-through, significant indirect and direct influence to the exchange rate as potential obstacles for successful inflation targeting in the Republic of Serbia.

In Search of Successful Inflation Targeting: Evidence from an Inflation Targeting Index

In a first attempt to treat inflation targeting (IT) as a continuous variable, we construct IT subindices for 21 full-fledged ITers on three dimensions: flexibility, transparency, and explicitness. Comparing flexibility and transparency we find that (1) the impact of flexibility on both the mean and variation of inflation is more quadratic than that of transparency; (2) after adding the transparency index, the impact of flexibility is no longer significant. The significant and negative association between transparency and the level and variation of inflation is confirmed when we check for robustness by controlling for disinflation stage, subsampling, instrumental variable estimation, and principal component analysis (PCA).

Learning and Heterogeneity in GDP and Inflation Forecasts

We estimate a Bayesian learning model with heterogeneity aimed at explaining the evolution of expert disagreement in forecasting real GDP growth and inflation over 24 monthly horizons for G7 countries during 1990-2007. Professional forecasters are found to begin and have relatively more success in predicting inflation than real GDP at significantly longer horizons; forecasts for real GDP contain little information beyond 6 quarters, but forecasts for inflation have predictive value beyond 24 months and even 36 months for some countries. Forecast disagreement arises from two primary sources in our model: differences in the initial prior beliefs of experts, and differences in the interpretation of new public information. Estimated model parameters, together with two separate case studies on (i) the dynamics of forecast disagreement in the aftermath of the 9/11 terrorist attack in the U.S. and (ii) the successful inflation targeting experience in Italy after 1997, firmly establish the importance of these two pathways to expert disagreement.

Prospects of the Initiation of Inflation Targeting in RF

Bank of Russia officials have recently declared the possibility of switching to the inflation targeting regime in the medium run. The article considers benefits and shortcomings of monetary policy regime as well as the economic performance of the inflation targeting countries. The authors conclude that Russia now starts meeting conditions crucial for the success of inflation targeting. In such circumstances Russian monetary authorities have an opportunity to weaken the exchange rate goal in favor of the inflation goal.

Financial stability: A worthy goal, but how feasible?

Financial stability has proved elusive. Despite the success of central banks in controlling inflation, economies continue to experience periods of exchange rate overvaluation, stock market volatility and housing price bubbles that affect individuals very deeply. This note speculates that such financial volatility may be the product of three factors, (a) successful inflation targeting, (b) the existence of nonlinearities and differential economic dynamics, and (c) the recent evolution of key structural parameters in the economy. If so, then central banks might better focus on making financial systems more resilient than on trying to develop more sophisticated policies aimed at reducing financial volatility.

Econometric inflation targeting

Inflation targeting makes the Central Bank’s conditional inflation forecast the operational target for monetary policy. Successful inflation targeting requires knowing the transmission mechanisms to infl ation from shocks as well as instruments. The econometric implications are that the exogeneity assumptions of a conditonal forecasting model of inflation are crucial to the quality of the forecasts. We advise that econometric inflation forecasting should be based on ac ore wage-price model, grafted into aw ider set of equations that capture the important transmission mechanisms between inflation and policy instruments (interest rate, exchange rate) as well as between inflation and shocks to the economy. We develop am odel of the inflation process in Norway by estimating a dynamic model of wages and prices, supplemented with marginal models of the transmission mechanisms of shocks and instruments. The exogeneity assumptions are tested and accepted. Finally, we demonstrate the model responses to shocks and corresponding changes in monetary instruments and examine the suitability of the full system for inflation forecasting.

Inflation Targeting - The Holy Grail of Monetary Policy?

This paper argues that the success of inflation targeting is principally the result of having a clear unambiguous goal, price stability, for monetary policy that is determined not only by the central bank but by the political authorities more generally. With such a goal in place, and with support from other macroeconomic policies, the actual operating procedure a central bank should follow depends critically on the transmission mechanism of monetary policy and on the sources of shocks in the economy. It follows that implementation of a strategy of targeting inflation could look very different from one country to another. What would be an appropriate policy rule in an industrialized country would not necessarily be suitable in an emerging market even if the ultimate goal of the central bank were the same.

English Title Not Available [Turkish title: ENFLASYON HEDEFLEMESI: TEORi VE POLITIKA UYGULAMASI

Inflation targeting is a monetary policy strategy used after 1990s in industrialized countries.Initially New Zeland used inflation targeting as a monetary policy strategy, then UK, Israel and Canada used the same policy. Macroeconomic stability, well developed financial system, central bank instrument independence, transparent policies to build accountability and credibility is needed for the success of inflation targeting. The point or interval inflation rate can be used as a target. The target would be announced by governments and/or central banks. Consumer price index or core inflation is used for price index.

The Scope for Inflation Targeting in Developing Countries

Inflation targeting (IT) serves as monetary policy framework in several advanced economies, where it has enhanced policy transparency and accountability. The paper considers its wider applicability to developing countries. The prerequisites for a successful IT framework are identified as involving ability to carry out an independent monetary policy (free of fiscal dominance or commitment to another nominal anchor, like the exchange rate), and a quantitative framework linking policy instruments to inflation. These prerequisites are largely absent among developing countries, though several of them could with some further institutional changes and an overriding commitment to low inflation make use of an IT framework.

Is inflation targeting feasible in Poland?

In this paper we analyze whether inflation targeting is feasible in Poland. There are at least three prerequisites for successful inflation targeting: 1) central bank independence, 2) a high degree of central bank accountability, transparency, and communication to the public, and 3) a predictable and stable relationship between inflation and the instruments of monetary policy. While the first two prerequisites are relatively easy to analyze, the third criterion requires formal statistical analysis, which we undertake in this paper. The first two prerequisites for targeting are found to be met in Poland, and the empirical analysis shows some evidence of significant relationships between inflation and monetary instruments in Poland. Hence inflation targeting appears feasible in Poland.

Inflation Dynamics and Monetary Strategies: Evidence from Six Industrialized Countries

In this paper we address the issue whether a switch to inflation targeting can help build monetary policy credibility and can substitute for a track record of low inflation. To this end, we empirically evaluate the success of inflation targeting in Canada, New Zealand and the United Kingdom and investigate to what extent the joint dynamic processes of inflation and nominal interest rates in these three countries have experienced a structural break at the time of the regime switch to inflation targeting. The experience of Canada, New Zealand and the United Kingdom is matched with the United States, Australia and Germany. We find that the effectiveness of the direct inflation targeting approach to quickly increase low-inflation credibility so far is ambiguous and that this strategy is not clearly superior to intermediate monetary strategies.