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"Inflation targeting"
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Inflation targeting and policy rules : the case of Mexico, 2001-2012
\"Inflation Targeting and Policy Rules is an essential book for understanding how Mexico's monetary policy has been evolving and functioning, from the beginning of the century to recent, highlighting the doctrine of policy rules and the implementation of inflation targeting framework, both fundamental elements necessary to comprehend the operation of the main central banks of the world. The book is valuable because of its theoretical and empirical treatment applied to the policy rules and to inflation targeting, which range from their origin, criticism, development, controversies, evolution, and evaluation of the subject. It is accessible reading for anyone interested in approaching the subject of the monetary policy of a developing country. It is, without a doubt, a relevant addition to the bank of knowledge on the monetary reality of any country that has recently adopted inflation targeting approach and which uses interest rate as instrument of policy, as well as the flexible currency exchange regimen. It will become an essential source for future investigations in Mexico and other countries in similar situations. The book explains the analytical framework that consists of developing conditional probability as essential for rational expectations hypothesis; presents a synthetic but detailed exposure of the approach of inflation targeting, especially based on the consensus among monetary authorities in the pursuit of low and stable inflation, detailing some of the most relevant experiences as well as their main objections; reviews the process origin-evolution of monetary policy rules; assesses the actions of the Banco de México in terms of the implementation of the inflation targeting approach; summarizes the highlights of Mexico's monetary policy and offers conclusions. The book is suitable for macroeconomics courses and courses dealing with developing economies as well as for financial professionals seeking recent and trends.\"-- Provided by publisher.
Book
Threshold effects of inflation on the FDI - growth nexus: evidence from inflation-targeting countries in sub-Saharan Africa
The purpose of this study is to examine the threshold effect of inflation on the foreign direct investment (FDI) - economic growth nexus in sub-Saharan Africa using panel samples of countries that have adopted an inflation-targeting regime. The study sourced data from the World Bank's World Development Indicators over a period of 1982-2020 and adopted the fixed-effect panel threshold model approach for its analysis. The findings reveal two separate thresholds of inflation in the FDI - growth nexus. The growth-enhancing effect of FDI is largely realized when inflation is below the optimal threshold level of 7.26%. Beyond the second threshold level of 16.49%, the beneficial effect of FDI on growth is seen to diminish in terms of effect-size. This study provides new insights into the growth effect of FDI and the role of inflation levels in this nexus. The thresholds of inflation and the attendant size-effect of FDI on growth can be benchmarks for Africa and other developing and emerging economies in assessing their situations. As African monetary authorities choose which inflation targets to set for their monetary policies, the findings raise significant implications for them.
Journal Article
Short-run dynamics and long-run effects of monetary policy on residential property prices in South Africa
Purpose
The study aims to estimate the short- and long-run effects of monetary policy on residential property prices in South Africa. Over the past decades, there has been a monetary policy shift, from targeting money supply and exchange rate to inflation. The shifts have affected residential property market dynamics.
Design/methodology/approach
The Johansen cointegration approach was used to estimate the effects of changes in monetary policy proxies on residential property prices using quarterly data from 1980 to 2022.
Findings
Mortgage finance and economic growth have a significant positive long-run effect on residential property prices. The consumer price index, the inflation targeting framework, interest rates and exchange rates have a significant negative long-run effect on residential property prices. The Granger causality test has depicted that exchange rate significantly influences residential property prices in the short run, and interest rates, inflation targeting framework, gross domestic product, money supply consumer price index and exchange rate can quickly return to equilibrium when they are in disequilibrium.
Originality/value
There are limited arguments whether the inflation targeting monetary policy framework in South Africa has prevented residential property market boom and bust scenarios. The study has found that the implementation of inflation targeting framework has successfully reduced booms in residential property prices in South Africa.
Journal Article
Inflation Targeting Skepticism
This paper makes twofold contributions. First, it critically reviews empirical literature along the key dimensions of inflation targeting (IT)—skepticism/critique to ascertain whether such skepticism is a myth or reality. Second, it critically reviews the so-called preconditions and operational prerequisites of IT and evaluates Pakistan’s existing state to draw lessons on whether Pakistan is in a position to adopt IT successfully. Contrary to the skeptic’s views, the review indicates that by and large the benefits of IT are promising not only in terms of macroeconomic performance—as measured by inflation, output, interest rate, exchange rate and their variants—but it also allows flexibility to effectively deal with real, financial as well as external sector shocks. The current state of preconditions and operational prerequisites in Pakistan seems adequate, which better positions the State Bank of Pakistan (SBP) to adopt IT. Statutory prioritisation of price stability, consistent inflation targets, and strict accountability mechanisms as well as aggressive disinflation need to be improved for successful implementation of IT.
Journal Article
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.
Journal Article
External shocks and monetary policy under the inflation targeting regime (ITR): An analysis of the determinants of inflation for the period 2000-2021
This article theoretically and empirically investigates the determinants of inflation in a sample of 83 countries, including countries that adopt an inflation targeting regime (ITR) and countries that do not, for the period 2000 to 2021. The hypothesis that guides the research is that the recent events or shocks in the global economy (the subprime crisis, the \"Eurozone\" crisis, the COVID-19 pandemic and, more recently, the war in Ukraine, among others) have resulted in supply shocks - exchange rates, food and energy - causing a rise in inflation and bringing recessive effects that may be more pronounced in ITR countries, given the greater institutional rigidity of the regime. The empirical part of the research includes an analysis of the determinants of inflation in the sample of ITR and non-ITR countries, with a focus on variables that represent supply shocks, in addition to a proxy for the existence of global conflicts, the latter being a potential contribution of the research. The main results, despite the differences between developed and developing economies, suggest that the commodity index, exchange rate variations, and global conflicts positively impacted inflation in the analyzed period.
Journal Article
How justified is abandoning money from monetary policy? Evidence from dynamically simulated ARDL
The stable money demand function is a crucial policy tool of the monetary policy of any central bank, which links the monetary sector of an economy to its real sector. Notably, after the global financial crisis of 2007-08, the role of money has come to be envisaged as an essential issue while formulating and conducting the monetary policy, especially at zero lower bound. It is crucial to know whether money demand is stable for inferring a sound monetary policy. To this end, the present study examines the short- and long-run money demand relationship and its stability in India from 2006:Q3 to 2019:Q4. The study has employed a dynamically simulated autoregressive distributed lag (ARDL) cointegration approach, which shows a well-specified and stable money demand in India after incorporating the inflation forecast variable as one of the essential determinants along with other covariates. Furthermore, the dynamically simulated impulse response also supports the economic relationship among variables. The current finding of stable money demand implies a policy implication in terms of focusing on monetary aggregate, in the ongoing flexible inflation targeting framework, as one of the essential information or indicator variables, which acts as a long-term assessment of short-term interest rate setting behaviour to achieve the macroeconomic goals.
Journal Article
Investigation of optimal inflation targets for 15 major oil exporting Sub-Saharan African countries: A panel threshold estimation
Purpose - The purpose of this paper is to investigate the optimal inflation targets for an appropriate exchange rate policy in 15 major oil exporting countries in Sub-Saharan African (SSA). Design/methodology/approach - Dynamic heterogeneous panel threshold techniques are used via threshold-effect test and threshold regression. This procedure is achieved through a grid search and bootstrapping replications method to stimulate the asymptotic distribution of the likelihood ratio test of the null hypothesis on no-threshold as against the alternative hypothesis. The p-values validate the threshold estimates. Findings - Findings revealed that the optimal inflation target has a turning point and its impact on the real exchange rate is up to a threshold level of 14.47 per cent. Furthermore, the inflation rate above the threshold level overwhelmingly revealed its effect on real exchange regimes. Research limitations/implications - It would have been a good idea to investigate optimal inflation targets for all African countries but due to inadequate data the selection criteria was narrowed to oil-exporting countries in Sub-Saharan Africa. Practical implications Inflation targeting beyond the threshold level would have serious implications on the monetary policy. Originality/value - To the best of the knowledge, this is the first study to look at optimal inflation targets for 15 major oil exporting countries in general and SSA countries in particular. The findings provide a critical analysis of an inflation regime for a typical oil-producing country that oil exports being their source of revenue.
Journal Article
Monetary and fiscal policy in the Great Moderation and the Great Recession
In this paper we argue for a new approach to monetary and fiscal policy. During the Great Moderation, the inflation targeting regime worked well. Central banks used the interest rate to stabilize inflation, and—subject to inflation being controlled—stabilized the level of demand. Fiscal policy exerted discipline over the public-sector deficits, thereby—indirectly—managing the level of public debt. Such 'fiscal housekeeping' worked well, because the monetary authorities were stabilizing the economy. But once private-sector deleveraging led to the Great Recession, and interest rates hit their zero bound, the outcome could no longer be managed by monetary policy. Recovery depended on the 'automatic stabilizers': output and tax revenues have fallen, public debt has been created, and assets have been created which a deleveraging private sector wishes to hold. But the effect has been very gradual. Recovery would have been faster if fiscal policy had been responsible for the restoration of full employment, in an environment which tolerated the necessary rises in public debt. Conversely, policies of austerity, designed to reduce public debt, have slowed the recovery. Growth will not be resumed until the private sector begins to invest strongly again, creating the financial assets which the private sector wishes to hold, thereby enabling public debt to be retired. This has not yet happened because the private sector, correctly, does not believe that macroeconomic policy is capable of sustaining a strong recovery.
Journal Article
MACROECONOMIC PERFORMANCE IN BRAZIL UNDER THE INFLATION TARGETING REGIME
This study analyses theoretically and empirically the relationship between monetary institutions and macroeconomic performance in Brazil, in the period after the adoption of the inflation targeting regime (ITR), in 1999. The hypothesis is that the monetary institutions inhibited economic growth, rather than being effective at controlling inflation, whose main causes are related to structural and institutional factors, indexation process and domestic and external shocks. The main results of the ITR, embodied in the highly restrictive monetary policy, are the following negative effects: A reduction in Gross Domestic Product (GDP) growth rates, a rise in the stock of public debt and an appreciation of the domestic currency. Likewise, the ITR has not been successful in maintaining inflation rate below its target. In this respect, revisions in the Brazilian monetary institutions would be essential to improve the results of the ITR, both in terms of actual inflation and economic performance.
Este estudio analiza teórica y empíricamente la relación entre las instituciones monetarias y el desempeño macroeconómico en Brasil en el periodo posterior a la adopción del régimen de metas de inflación (RMI) en 1999. La hipótesis es que las instituciones monetarias impidieron el crecimiento económico, más que controlar efectivamente la inflación, cuyas causas principales están relacionadas con factores estructurales e institucionales, procesos de indexación y choques internos y externos. Los principales resultados del RMI, consustanciados en la política monetaria altamente restrictiva, son los siguientes efectos negativos: una reducción de las tasas de crecimiento del producto interno bruto (PIB), un aumento del stock de deuda pública y una apreciación de la moneda nacional. Asimismo, el RMI no logró mantener la tasa de inflación por debajo de su meta. A este respecto, revisiones en las instituciones monetarias brasileñas serían esenciales para mejorar los resultados del RMI, tanto en términos de inflación como de desempeño económico.
Journal Article