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Inflation Targeting (inflation + targeting)

Distribution by Scientific Domains

Business, Economics, Finance and Accounting	86%
Humanities and Social Sciences	13%

Selected Abstracts

INFLATION TARGETING AND THE ECONOMY: LESSONS FROM CANADA'S FIRST DECADE

CONTEMPORARY ECONOMIC POLICY, Issue 1 2001
C Freedman
Inflation targeting has become the centerpiece of the monetary policy framework in a number of industrial countries and emerging economies. The first part of this article examines the Canadian experience with inflation targeting since its introduction in early 1991 and various issues that require resolution in establishing such a framework. It also examines the way inflation targets deal with demand, price, and productivity shocks. The second part focuses on Canada's economic performance during the 1990s. Factors other than monetary policy - most notably private sector restructuring and the fiscal situation in the first half of the decade - played an important role in the sluggishness of the recovery from the recession of 1990,91. Trend growth in Canada during the 1990s was lower than in earlier periods and than U.S. trend growth over the same period. The article examines the role of such factors as productivity growth and participation rates in explaining the differences. I conclude that a good monetary policy is necessary but not sufficient for good economic outcomes. [source]

CAN TUNISIA MOVE TO INFLATION TARGETING?

THE DEVELOPING ECONOMIES, Issue 1 2007
Adel BOUGHRARA
E47; E52; E58 Inflation targeting has become an alternative monetary strategy that has been followed by many industrial and emerging countries. This study considers whether the adoption of inflation targeting would be relevant for Tunisia. More specifically, this paper aims at checking whether the necessary conditions for the successful implementation of such a strategy are fulfilled or not. It is found that fiscal dominance does not constitute the main hindrance to the adoption of inflation targeting. Other impediments have been identified, especially a weak financial system in general, the unsound and fragile banking system in particular, and the glaring lack of knowledge about the monetary transmission mechanism. Furthermore, it has been pointed out that if Tunisian monetary authorities continue to carry out the present exchange rate regime, namely, the constant real exchange rate rule, an inflation targeting regime will not be sufficient to properly contain the inflation pressures caused by demand shocks. [source]

INFLATION TARGETING AND THE STATIONARITY OF INFLATION: NEW RESULTS FROM AN ESTAR UNIT ROOT TEST

BULLETIN OF ECONOMIC RESEARCH, Issue 4 2006
Andros Gregoriou
E31; C22 ABSTRACT In this paper, we examine the time series properties of inflation in seven countries that have adopted inflation targeting. Unlike previous studies, we utilize a non-linear mean reverting adjustment mechanism for inflation and we discover that, although deviations of inflation from the target can exhibit a region of non-stationary behaviour, overall they are stationary indicating successful targeting implementation. [source]

Estimating the Fractional Order of Integration of Yields in the Brazilian Fixed Income Market

ECONOMIC NOTES, Issue 3 2007
Benjamin M. Tabak
This paper presents evidence that yields on the Brazilian fixed income market are fractionally integrated, and compares the period before and after the implementation of the Inflation Targeting (IT) regime. The paper employs the commonly used GPH estimator and recently developed wavelets-based estimator of long memory. Empirical results suggest that interest rates are fractionally integrated and that interest rate spreads are fractionally integrated, with a higher order of integration in the period after the implementation of the IT regime. These results have important implications for the development of macroeconomic models for the Brazilian economy and for long-term forecasting. Furthermore, they imply that shocks to interest rates are long-lived. [source]

Modelling Monetary Policy: Inflation Targeting in Practice

ECONOMICA, Issue 282 2004
Christopher Martin
This paper estimates a simple structural model of monetary policy in the UK focusing on the policy of inflation targeting introduced in 1992. We find that: (i) the adoption of inflation targeting led to significant changes in monetary policy; (ii) post-1992 monetary policy is asymmetric as policy-makers respond more to upward deviation of inflation away from the target; (iii) post-1992 policy-makers may be attempting to keep inflation within the 1.4%,2.6% range rather than pursuing a point target of 2.5% and (iv) the response of monetary policy to inflation is nonlinear as interest rates respond more when inflation is further from the target. [source]

Interdependencies between Monetary Policy and Foreign Exchange Interventions under Inflation Targeting: The Case of Brazil and the Czech Republic

INTERNATIONAL FINANCE, Issue 2 2010
Jean-Yves Gnabo
Inflation-targeting central banks often explicitly reserve the right to intervene in foreign exchange markets when the exchange rate ,deviates from fundamentals' and/or ,displays excessive volatility'. In the case of emerging markets, central banks can often ill afford to neglect exchange rate developments when setting monetary policy because of a high pass-through of nominal exchange rate changes to domestic prices. As a result, interventions and monetary policy are interrelated, a hypothesis that has been overlooked in the literature. To bridge this gap, this paper includes monetary policy indicators in the estimation of intervention reaction functions for Brazil and the Czech Republic since the adoption of inflation targeting. Our main finding is that interventions take place independently of the contemporaneous monetary policy setting in Brazil, but not in the Czech Republic, where both policies appear to be coordinated. [source]

The Future of Inflation Targeting Edited by Christopher Kent and Simon Guttmann

THE ECONOMIC RECORD, Issue 259 2006
John Hawkins
No abstract is available for this article. [source]

Does Inflation Targeting Affect the Trade,off Between Output Gap and Inflation Variability?

THE MANCHESTER SCHOOL, Issue 4 2002
Philip Arestis
We utilize a stochastic volatility model to analyse the possible effects of inflation targeting on the trade,off between output gap variability and inflation variability. We find that the adoption of inflation targets (in New Zealand, Australia, Canada, the UK, Sweden and Finland) might result in a more favourable monetary policy trade,off (except in Australia and Finland). This conclusion is reached by comparing, first, the economic performance of targeting countries in the 1980s and the 1990s; and second, the economic performance in the 1990s of targeting and non,targeting countries (the USA, Japan, Switzerland, Germany, France and the Netherlands). We focus on two possible explanations for the performance of the inflation,targeting regime: the relatively high degree of monetary policy transparency, and the presence of a flexible institutional framework. [source]

Inflation Targeting, Exchange Rate Volatility and International Policy Coordination

THE MANCHESTER SCHOOL, Issue 4 2002
Fernando Alexandre
In a linear rational expectations two,country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation,targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well. [source]

INFLATION TARGETING AND THE ECONOMY: LESSONS FROM CANADA'S FIRST DECADE

Open-Economy Inflation-Forecast Targeting

GERMAN ECONOMIC REVIEW, Issue 1 2006
Kai Leitemo
Inflation targeting; forecast targeting; monetary policy; small open economy Abstract. We study simple inflation-forecast targeting in an open-economy setting. Simple inflation-forecast targeting implies setting an interest rate which, if kept unchanged throughout the forecast-targeting horizon, produces a conditional inflation forecast equal to the inflation target at the end of the horizon. We find that the optimal forecast-targeting horizon is relatively short (one year). A longer horizon does not consistently contribute to improved output stability, indeed it increases exchange rate variability and traded sector variability. The targeting procedure is substantially inferior to the optimal pre-commitment policy. Moreover, the targeting procedure does not necessarily determine the rational-expectations equilibrium and is subject to time inconsistency. [source]

CAN TUNISIA MOVE TO INFLATION TARGETING?

INFLATION TARGETING AND THE ECONOMY: LESSONS FROM CANADA'S FIRST DECADE

Modelling Monetary Policy: Inflation Targeting in Practice

Interdependencies between Monetary Policy and Foreign Exchange Interventions under Inflation Targeting: The Case of Brazil and the Czech Republic

Core Inflation and Monetary Policy

INTERNATIONAL FINANCE, Issue 3 2001
Marianne Nessén
What are the implications of targeting different measures of inflation? We extend a basic theoretical framework of optimal monetary policy under inflation targeting (Svensson 1997) to include several components of CPI inflation, and analyse the implications of using different measures of inflation as the target variable , headline CPI inflation, core inflation, and CPI excluding interest rates. Our main results are the following. First, barring the interest rate component, temporary shocks to inflation do not affect optimal monetary policy under any regime. Second, indirect (second-round) effects of disturbances on target variables need to be accounted for properly. Simply excluding seemingly temporary disturbances from the reaction function risks leading to inappropriate policy responses. Third, it may be optimal to respond to changes in one measure of inflation even if the target is defined in terms of another. Fourth, the presence of the direct interest rate component in the CPI tends to push optimal monetary policy in an expansionary direction. The net effect, considering also the traditional channel, however, depends on the nature of the initial disturbance. [source]

The empirics of monetary policy rules in open economies

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 4 2001
Richard H. Clarida
This paper uses the empirical framework for formulating and estimating forward looking monetary policy rules developed in Clarida, Gali and Gertler (1998, 1999, 2000, 2001) and Clarida (2000) to assess what we know, don't know, and can't tell about monetary policy making in an open economy with an (implicit) inflation target. Among the issues discussed are: the relationship between structural VAR models of monetary policy and exchange rates and estimates of forward-looking Taylor rules; the relationship between inflation targeting and leaning against the (exchange rate) wind; why central bankers are averse to even wide-band target zones; quantifying stresses and costs of a one-size-fits-all monetary policy for the members of a monetary union or currency bloc. Copyright © 2001 John Wiley & Sons, Ltd. [source]

Monetary Policy in a Forward-Looking Input,Output Economy

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 4 2009
BRAD E. STRUM
inflation targeting; price-level targeting; intermediate goods This paper examines the implications for monetary policy of sticky prices in both final and intermediate goods in a New Keynesian model. Both optimal policy under commitment and discretionary policy under simple loss functions are studied. Household utility losses under alternative loss functions are compared; additionally, the robustness of policy performance to model and shock misperceptions and parameter uncertainty is examined. Targeting inflation in both consumer and intermediate goods performs better than targeting inflation in one sector; targeting price levels of both final and intermediate goods performs significantly better. Moreover, targeting price levels in both sectors yields superior robustness properties. [source]

Real Wage Rigidities and the New Keynesian Model

JOURNAL OF MONEY, CREDIT AND BANKING, Issue 2007
OLIVIER BLANCHARD
oil price shocks; inflation targeting; monetary policy; inflation inertia Most central banks perceive a trade-off between stabilizing inflation and stabilizing the gap between output and desired output. However, the standard new Keynesian framework implies no such trade-off. In that framework, stabilizing inflation is equivalent to stabilizing the welfare-relevant output gap. In this paper, we argue that this property of the new Keynesian framework, which we call the divine coincidence, is due to a special feature of the model: the absence of nontrivial real imperfections. We focus on one such real imperfection, namely, real wage rigidities. When the baseline new Keynesian model is extended to allow for real wage rigidities, the divine coincidence disappears, and central banks indeed face a trade-off between stabilizing inflation and stabilizing the welfare-relevant output gap. We show that not only does the extended model have more realistic normative implications, but it also has appealing positive properties. In particular, it provides a natural interpretation for the dynamic inflation,unemployment relation found in the data. [source]

What Macroeconomic Measures Are Needed for Free Trade to Flourish in the Western Hemisphere?

LATIN AMERICAN POLITICS AND SOCIETY, Issue 2 2004
Barry Eichengreen
ABSTRACT Recent experience has made clear the importance of macroeconomic stability, and exchange rate stability in particular, in generating support for regional integration. The tensions created by exchange-rate and financial volatility are clearly evident in the recent history of Mercosur and may also hinder the development of a Free Trade Area of the Americas. This essay argues that ambitious schemes for a single regional currency are not a practical response to this problem. Nor would a system of currency pegs or bands be sufficiently durable to provide a lasting solution. Instead, countries must solve this problem at home. In practice, this means adopting sound and stable monetary policies backed by a clear and coherent operating strategy, such as inflation targeting. With such policies in place, exchange rate volatility can be reduced to levels compatible with regional integration. [source]

Monetary Frameworks and Institutional Constraints: UK Monetary Policy Reaction Functions, 1985,2003

OXFORD BULLETIN OF ECONOMICS & STATISTICS, Issue 4 2005
Christopher Adam
Abstract Monetary policy reaction functions are estimated for the UK over three periods , 1985,90, 1992,97 and 1997,2003 , in order to disentangle two effects: the switch from an emphasis on exchange rate stabilization to inflation targeting, and the introduction of instrument-independence in 1997. The external factors considered include US as well as German interest rates, and this leads to the identification of ,domestic' and ,international' models of the reaction function. The results suggest that it is the changes in the institutional arrangements rather than those in the targeting regime which have been decisive in the development of policy in this period. [source]

On the Effects of Inflation Shocks in a Small Open Economy

THE AUSTRALIAN ECONOMIC REVIEW, Issue 3 2007
Sushanta K. Mallick
The effects of monetary policies remain always an important topic in macroeconomics. In the literature (closed and open economy), there is no theoretical as well as empirical consensus regarding the effects of monetary policies. In this paper we examine the real effects of inflation in an open economy. Australia is a classic example of a small open economy and is known to exercise inflation targeting. Using quarterly data from Australia and employing vector autoregressive (VAR) analysis, we provide evidence that inflation, both in the short and long run, negatively affects durable and non-durable consumption and investment, and has a positive effect on the current account. Further, we show that consumption of durable goods is more sensitive than the consumption of non-durables during the initial periods following inflationary shocks. [source]

Inflation- Plus Targeting at the Reserve Bank of Australia

THE AUSTRALIAN ECONOMIC REVIEW, Issue 4 2004
Stephen Bell
This article first outlines the dynamics of what appear to be increasingly prevalent cycles of asset price inflation in liberalised financial systems, as well as the difficulties entailed in successful monetary policy responses. The article then analyses the Reserve Bank of Australia's policy responses to recent rises in credit growth and asset price inflation in the property sector. The Bank's responses are characterized in terms of an inflation- plus targeting framework which has subtly redefined the Bank's approach to inflation targeting to include vaguely defined factors such as mediumterm,risks', as well as extending the time frame of such risk assessment. The article explains why, for a variety of reasons, the Bank has been reticent to fully declare its hand. [source]

Inflation Targeting as a Framework for Monetary Policy: A Cross-Country Analysis

THE AUSTRALIAN ECONOMIC REVIEW, Issue 3 2003
William Seyfried
This study makes use of a dynamic Taylor-type model to examine the conduct of monetary policy by central banks that profess to engage in inflation targeting. Previous research regarding inflation targeting and Taylor-type rules is reviewed and a dynamic Taylor-type model is developed. Tests for regime shifts upon the adoption of inflation targeting indicate a significant change in policy in each of the nations in the study for which sufficient data were available. Next, the central bank reaction functions were estimated. Results suggest that most of the central banks conducted a policy of inflation targeting by seeking to contain inflationary pressures rather than reacting to current inflation. [source]

CAN TUNISIA MOVE TO INFLATION TARGETING?

Stabilising Properties of Discretionary Monetary Policies in a Small Open Economy,

THE ECONOMIC JOURNAL, Issue 508 2006
Alfred V. Guender
This article sets out a simple New Keynesian open-economy model and shows that the conduct of discretionary monetary policy in an open economy differs substantially from the closed-economy framework. The article shows analytically that the existence of the direct exchange rate channel in the open economy Phillips Curve impairs the perfect stabilising property of monetary policy in the face of demand-side disturbances under domestic inflation targeting. If CPI inflation is instead the target, then the perfect stabilising property of monetary policy breaks down even in the absence of the direct exchange rate channel in the Phillips Curve. [source]

A Term Structure Decomposition of the Australian Yield Curve,

THE ECONOMIC RECORD, Issue 271 2009
RICHARD FINLAY
We use data on coupon-bearing Australian Government bonds and Overnight Indexed Swap (OIS) rates to estimate risk-free zero-coupon yield and forward curves for Australia from 1992 to 2007. These curves and analysts' forecasts of future interest rates are then used to fit an affine term structure model to Australian interest rates, with the aim of decomposing forward rates into expected future overnight cash rates plus term premia. The expected future short rates derived from the model are on average unbiased, fluctuating around the average of actual observed short rates. Since the adoption of inflation targeting and the entrenchment of low and stable inflation expectations, term premia appear to have declined in levels and displayed smaller fluctuations in response to economic shocks. This suggests that the market has become less uncertain about the path of future interest rates. Towards the end of the sample period, term premia have been negative, suggesting that investors may have been willing to pay a premium for Commonwealth Government securities. [source]

Monetary Policy Reaction Functions in Australia,

THE ECONOMIC RECORD, Issue 253 2005
GORDON De BROUWER
Interest-rate functions are estimated to assess the stability of Australian monetary policy in the post-float period. The results indicate that the Reserve Bank of Australia (RBA) is forward-looking, focusing on outcomes 1 year ahead. The weight on inflation in the RBA reaction function has increased, and that on output has decreased, since inflation targeting. This is robust to various definitions of the output gap. The RBA also appears to take modest account of sustained movements in the effective exchange rate. Point estimates of the implied neutral rate of interest are from 5 to 5½ per cent. [source]

Exploring the Role of the Real Exchange Rate in Australian Monetary Policy

THE ECONOMIC RECORD, Issue 244 2003
Richard Dennis
An important issue in small open-economies is whether policymakers should respond to exchange rate movements when they formulate monetary policy. Micro-founded models tend to suggest that there is little to be gained from responding to exchange rate movements, and the literature has largely concluded that such a response is unnecessary, or even undesirable. This paper examines this issue using an estimated model of the Australian economy. In contrast to microfounded models, according to this model policymakers should allow for movements in the real exchange rate and the terms-of-trade when they set interest rates. Further, taking real exchange rate movements into account appears even more important with price level targeting than with inflation targeting. [source]