CAN A RULE‐BASED MONETARY POLICY FRAMEWORK WORK IN A DEVELOPING COUNTRY? THE CASE OF YEMEN

Monetary policy in Yemen is largely rudimentary and ad hoc in nature. The Central Bank of Yemen's (CBY) approach has been based on discretionary targeting of broad money without any clear target to anchor inflation expectations. This paper argues in favor of a new formal monetary policy framework for Yemen emphasizing a proactive and rule‐based approach with a greater direct focus on price stability in the context of a flexible management of the exchange rate. Although, as in many developing countries, institutional capacity is a concern, adopting a more formal framework could impel the kind of changes that are required to strengthen the ability of the CBY in achieving low and stable rates of inflation over the medium term.     

CAN TUNISIA MOVE TO INFLATION TARGETING?

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.     

The exchange rate and monetary conditions in the Euro area

The Exchange Rate and Monetary Conditions in the Euro Area. — Using information from a variety of sources, this paper suggests that the exchange rate will play an important role in the transmission of the impact of monetary policy on the real economy and inflation in the euro area. As a first approximation it would be reasonable to assume that an increase in the real 90-day interest rate of 100 basis points would have the same effect on demand two years later as a 3.5 percent fall in the real euro exchange rate. This implies that the euro area will tend to behave like a large open economy rather than a closed economy and hence that it would be helpful in informing monetary policy to construct a Monetary Conditions Index (MCI).     

A nonnormative theory of inflation and central bank independence

A Nonnormative Theory of Inflation and Central Bank Independence. — The authors study monetary policy under different central bank constitutions when the labor-market insiders set the minimal wage so that the outsiders are involuntarily unemployed. If the insiders are in the majority, the representative insider will be the median voter. The authors show that an independent central bank, if controlled by the median voter, does not produce a systematic inflation bias, albeit equilibrium employment is too low from a social welfare point of view. A dependent central bank, in contrast, is forced by the government to collect seigniorage and to take the government’s re-election prospects into account. The predictions of their theory are consistent with the evidence that central bank independence decreases average inflation and inflation variability, but does not affect employment variability.     

LOUD AND CLEAR? CAN WE HEAR WHEN THE SARB SPEAKS?

Inflation targeting is a forward‐looking framework for monetary policy that has brought unprecedented transparency to the process of monetary policy. This paper aims to assess the degree to which the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC) has, since the introduction of inflation targeting, successfully communicated to the public its policy analysis, and, in particular, the expected future policy changes. It follows international literature in constructing a numerical index that is used to reflect the information content of the SARB's communications, specifically the monetary policy statements that accompanied each of the MPC meetings since 2000. This method allows us to judge, systematically, the degree to which the MPC has communicated successfully, and the evolution of that success over the past nine years. We find evidence that the MPC has succeeded in signalling their likely future policy decision with consistency over this period.     

Will the Sarb always Succeed in Fighting Inflation with Contractionary Policy?

The conventional view is that a monetary policy shock has both supply‐side and demand‐side effects, at least in the short run. Barth and Ramey show that the supply‐side effect of a monetary policy shock may be greater than the demand‐side effect. We argue that it is crucial for monetary authorities to understand whether an increase in expected future inflation is due to supply shocks or demand shocks before applying contractionary policy to forestall inflation. We estimate a standard New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy for the South African economy to show that whether the South African Reserve Bank should apply contractionary policy to fight inflation depends critically on the nature of the disturbance. If an increase in expected future inflation is mainly due to supply shocks, the South African Reserve Bank should not apply contractionary policy to fight inflation, as this would lead to a persistent increase in inflation and a greater loss in output. Our estimation results also show that with a moderate level of cost‐channel effect and nominal rigidities, a New Keynesian dynamic stochastic general equilibrium model with the cost channel of monetary policy is able to mimic the price puzzle produced by an estimated vector autoregressive model.     

Asymmetric monetary policies? the case of Germany and France

How dissimilar are the policy objectives of the Bundesbank and the Banque de France and have those objectives converged since the conception of the EMS? We address these questions by estimating objective functions for the flexible-exchange-rate and the EMS periods. Vector autoregressions are used to characterize the economic environment and an inverse control methodology is used to infer the objectives of the central banks. We find that the Bundesbank's policy actions are compatible with its having consistently placed a high weight on the objective of price stability. The Banque de France on the other hand appears to have considered output stability to be an important target in the early EMS period. After a major French policy shift in 1982 the objectives of two Central Banks appear to be quite similar.     

Inflation Targeting and Relative Price Variability: What Difference Does Inflation Targeting Make?

This article studies the effects of inflation targeting (IT) on relative price variability (RPV) using a data set of twenty countries comprising both targeters and nontargeters. We find that a decline in mean inflation after IT adoption is not necessarily associated with a similar fall in RPV and that what matters most for the structural changes in RPV is the initial inflation regime prior to the adoption of IT rather than IT adoption itself. IT adoption impacts the shape of the underlying relationship between inflation and RPV in countries with initially high inflation rates, moving it from monotonic to the U‐shaped profile observed consistently for countries with low‐inflation regimes. The minimum point of this U‐shaped curve is indicative of the public's expectations of inflation and is very close to the announced target for inflation in most of the countries we study.     

INTERNATIONAL LESSONS FOR THE PROPERTY PRICE BOOM IN SOUTH AFRICA

South Africa appears to share some of the characteristics (property price boom, easing of monetary policy, strong domestic demand growth) of asset price booms in industrial countries that were followed by a period of weak growth. The international experience suggests that a number of practical obstacles need to be overcome before a more proactive role for monetary policy is warranted. However, a larger variety of available mortgage contracts, including longer‐term fixed‐rate contracts, should allow for a more efficient allocation of interest rate risks. Also, a more systematic nationwide collection of property price data, including data on commercial property price developments, would provide a more representative basis for analysis.     

Too Many Cooks? Committees in Monetary Policy

How many people should decide monetary policy? In this article, we take an empirical perspective on this issue and analyze the relationship between the number of monetary policy decision makers and monetary policy outcomes. Using a new data set that characterizes central bank monetary policy committees (MPCs) in more than 30 countries from 1960 through 2006, we find a U‐shaped relationship between MPC size and inflation; our results suggest that the lowest level of inflation is reached at MPCs with an intermediate size of about five to nine members. Similar results are obtained for inflation variability. Other MPC characteristics also matter for monetary policy outcomes, though to a smaller degree. For instance, the membership composition of the MPC as well as the frequency of MPC membership turnover appears to affect economic variables.