Monetary Aggregates Targeting,Inflation Targeting and Inflation Stabilization in Ghana

The central bank of Ghana (BoG) has operated monetary aggregates targeting and inflation targeting since the 1980s, to ensure enhanced output growth, low unemployment and stable, low inflation. Under inflation targeting, the inflation rate averaged 13.26 per cent per annum between 2007 and 2015, compared with 29.22 per cent per annum under monetary aggregates targeting. The relatively lower inflation rates notwithstanding, an average inflation rate of 13.2 per cent per annum is far above the medium‐term target of 8 per cent. This paper has examined the effectiveness of monetary aggregates targeting and inflation targeting in keeping inflation at moderate levels. The autoregressive distributed lag (ARDL) model was applied to the data covering the period 1970–2015. The results show that monetary targeting has steered inflation to moderate levels only in the short run while inflation targeting has maintained low inflation rates in both short run and long run. But neither regime has kept inflation at stable levels and within the target band, due to the sluggish transmission of broad money supply and prime rate changes to inflation. We implore the monetary authorities to strengthen the institutional setup for steering short‐term interest rates in Ghana. They should also enhance the BoG Act 2002 (Act 612), to develop secondary anchors and rules around output, money supply and fiscal deficit. Finally, the monetary policy committee should monetary policy credibility and transparency through strengthening its communication framework.     

MODELLING INFLATION IN SOUTH AFRICA: A MULTIVARIATE COINTEGRATION ANALYSIS

We employ an expectations augmented Phillips curve framework to investigate the link between inflation, unit labour costs, the output gap, the real exchange rate and inflation expectations. Using multivariate cointegration techniques, we find evidence consistent with mark‐up behaviour of output prices over unit labour costs. Most importantly, we find that the mark‐up in the South African economy is much higher than in the U.S. For South Africa we find a markup of about 30 per cent: three times as high as the 10 per cent markup found for the U.S.     

FORECASTING SOUTH AFRICAN INFLATION

This paper looks at what variables are useful for forecasting inflation starting in 1990. I show that the output gap, a measure of real economic conditions, does seem to provide useful information for forecasting inflation. This is good news for the Reserve Bank, since the primary way that the Reserve Bank tries to affect future inflation is through real economic conditions. In addition, short‐term interest rates and import price inflation also seem to provide useful information. The most accurate of these forecasts suggests a root mean square forecast error of 1–2 per cent for 1‐year ahead inflation, which is within the Reserve Bank's current target range.     

Wage-Setting and Inflation Targets in EMU

Although the operation of national coordinated wage-bargainingsystems in EMU has produced low inflation rates, EMU-wide inflationhas been above the ECB target rate for the last 3 years. Bycontrast, under the ERM, inflation rates declined steadily after1992 to below 2 per cent in both the last 2 years of the regime.It is argued that this was the consequence of two low-inflationincentives under ERM: (i) the Maastricht inflation conditionfor EMU entry; and (ii) the combination of the Bundesbank threatto raise interest rates if German wage and price inflation roseabove acceptable limits, linked to the need for other ERM membersto follow low German inflation to stay within the exchange-ratebands. These incentives no longer operate under EMU, where individualeconomies do not have an incentive to contribute to low EMU-wideinflation. We suggest that inflation coordination between thelarge EMU member states might contribute to a solution whilepermitting the continuation of real exchange-rate adjustmentsof smaller economies.     

Financing of land purchase by small‐scale farmers

Binswanger attributes the problem facing poor people in financing land purchase to the inclusion of a real capital gains component in the price of land. This article attributes it largely to a cash flow problem which arises from positive inflation rates. The Ricardian rent return to land in South African agriculture is estimated at between 4 and 5 per cent while the Land Bank's interest rate is 15 per cent. Interest payments on a bond can therefore not be met from rents to land alone. If, as an extreme situation, the expected inflation rate were zero, farmers might have been able to borrow funds at 4 to 5 per cent. To bring debt servicing in line with projected cash flows in the real situation, mortgage interest rates could be subsidised; or, in an alternative affirmative action, the state could contribute towards the purchase price of land. These alternatives are discussed.     

Causes of repressed inflation in the Soviet consumer market, 1965–1989: retail price subsidies,the siphoning effect,and the budget deficit

This article uses material which has recently been made available from Russian archives to analyse the causes of repressed inflation in the Soviet consumer market. It finds that retail price subsidies, which increased as a proportion of state budget expenditure from 4 per cent in 1965 to 20 per cent in the late 1980s, intensified consumer market disequilibrium. The provision of these subsidies had negative effects on the market by maintaining the purchasing power of households for consumer goods and by increasing the budget deficit. The unauthorized purchase of consumer goods by enterprises tended to increase during these years also.     

中国菲利普斯曲线的理论分析和实证研究

菲利普斯曲线是分析失业与通货膨胀变动关系的一个强有力工具 ,并可以勾勒出经济运行态势。但是 ,由于经济活动影响因素的复杂性及其组合在各国之间的差异 ,特别是我国的特殊国情及正处于经济转轨这一特殊的发展时期 ,传统的菲利普斯曲线及其理论无法直接拟合我国菲利普斯曲线     

The choice of the inflation rate as a target in an economy with pricing-to-market

This article verifies an effect caused by introducing alternative inflation targeting in a two-country economy model by following the new open-economy macroeconomics trend of incorporating pricing-to-market behavior among firms. Previous research suggests that, from the point of view of stabilizing output and inflation, central banks must choose producer price inflation as a target under the assumption that purchasing power parity applies. This paper, however, with a revived conventional pricing-to-market model, indicates that a central bank must choose consumer price inflation, not producer price inflation, from the point of view of stabilizing output and inflation.     

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.     

OUTPUT-INFLATION TRADEOFF IN CHINA

High growth and wide fluctuations in fixed investment are the main driving forces causing inflation in China during its economic reform period. Investment expansion generates strong demand pressures in the consumption goods market. Its inflationary impact is magnified further as it brings about higher wage costs during economic booms. In the paper, an implied short-run tradeoff has been derived from the dynamic simulation of a small macroeconomic model. In a given year, each additional percentage point of aggregate output growth or investment growth will bring about a 2.6 or a 0.9 per cent increase, respectively, in the rate of inflation for that year. These estimates suggest that the surge in fixed investment accounts almost fully for the 1993–95 inflationary spell.     

Labour market discrimination in the North West province of South Africa

This article provides an econometric estimate of labour market discrimination in the North West province of South Africa. Using data obtained from the October 1995 Household Survey, it was found that in 1995 statistically significant gender discrimination exists against women in North West's labour market. The male discriminatory wage advantage of 127 per cent and the female discriminatory disadvantage of 195 per cent were ascribed to the overrewarding and underrewarding of some personal characteristics of males and females, respectively. Productivity differentials of 40 per cent in favour of females and a premium paid to women measuring 71 per cent also exist. Discrimination explains 50 per cent of the wage gap between genders, while productivity differentials and the premium account for 13 and 37 per cent respectively. The study supports 'affirmative action' and suggests policies that aim to alter the occupational distributions, and these may need to target educational decisions made prior to labour market entry.     

Towards a Measure of Core Inflation using Singular Spectrum Analysis

This paper constructs a number of possible core measures of inflation using singular spectrum analysis (SSA). Annual changes in monthly inflation are decomposed into its trend, oscillatory and noise components in order to develop an understanding of the trend and cyclicality in South African headline inflation. Three cyclical components with differing amplitude and frequency are identified. The trend and cyclical components of inflation are found to be a good approximation of core inflation, the inertial part of inflation. These core measures are compared with other candidate core measures based on the properties of a good core inflation measure. Generally, the SSA measures outperform commonly used measures of core inflation based on both in‐ and out‐of‐sample performance.     

What to Aim for? The Choice of an Inflation Objective when Openness Matters

Inflation targeting countries generally define the inflation objective in terms of the consumer price index. Studies in the academic literature, however, reach conflicting conclusions concerning which measure of inflation a central bank should target in a small open economy. This paper examines the properties of domestic, CPI, and real-exchange-rate-adjusted (REX) inflation targeting. In one class of open economy New Keynesian models there is an isomorphism between optimal policy in an open versus closed economy. In the type of model we consider, where the real exchange rate appears in the Phillips curve, this isomorphism breaks down; openness matters. REX inflation targeting restores the isomorphism but this may not be desirable. Instead, under domestic and CPI inflation targeting the exchange rate channel can be exploited to enhance the effects of monetary policy. Our results indicate that CPI inflation targeting delivers price stability across the three inflation objectives and will be desirable to a central bank with a high aversion to inflation instability. CPI inflation targeting also does a better job of stabilizing the real exchange rate and interest rate which is an advantage from the standpoint of financial stability. REX inflation targeting does well in achieving output stability and has an advantage if demand shocks are predominant. In general, the choice of the inflation objective affects the trade-offs between policy goals and thus policy choices and outcomes.     

On the conduct of monetary policy in Vietnam

Vietnam has the highest inflation rate in Southeast Asia (over 20 per cent year‐on‐year in 2011). This paper examines the extent to which inflation in Vietnam is due to its conduct of monetary policy. It is argued that, had the central bank implemented policy on a more timely basis, inflation would not have been as high as it was, but the more fundamental problem is that the central bank does not have the tools it needs to conduct monetary policy effectively. Monetary policy is further complicated by Vietnam's exchange rate policy. By choosing to peg the currency and maintain fairly free capital mobility, the country has all but given up the ability to pursue an independent monetary policy. As a consequence, the central bank is forced to attempt to sterilise its foreign exchange interventions, which it is ill‐equipped to do. The paper argues that financial sector liberalisation is needed not only to promote growth but also to maintain macroeconomic stability.     

扩展的总需求总供给模型——一个阐释我国宏观经济运行的分析框架

本文在附加预期的菲利普斯曲线基础上,通过引入可变的技术进步变量,修正了新古典的总供给曲线,指出除预期的通货膨胀率、产出缺口外,技术进步也是影响总供给曲线的重要变量;同时将总需求曲线扩展到开放经济条件下,从而推导出了“通货膨胀率——产出增长率”系统下的总需求总供给模型。作为对扩展后模型的检验,本文利用该模型阐释了我国宏观经济运行中的“高增长与低通胀并存”现象。     

The Chinese Phillips curve – inflation dynamics in the presence of structural change

This paper models inflation dynamics in China from 1987 to 2014 using a Phillips curve framework. The Phillips curve is generally estimated under the assumption of linearity and parameter constancy. The existence of structural breaks in China’s inflation dynamics make standard linear models inappropriate tools for analysis however. Our results find that the Chinese Phillips curve is characterised by a non-linear relationship. The inflation/output relationship takes the form of a concave curve. This suggests that changes in the level of output effect inflation in China more strongly in periods when output is operating below its potential but the relationship is weaker when output is operating at or above potential. Based on these findings, the People’s Bank of China (PBC) could consider output cost and policy response on a case-by-case basis depending on the level of output in relation to potential.     

Inflation in South Africa: An Assessment of Alternative Inflation Models

We consider the relative empirical performance of a range of inflation models for South Africa. Model coverage is of Phillips curve, New Keynesian Phillips curve, monetarist and structural models of inflation. Our core findings are that the single most robust covariate of inflation is unit labour cost. We further decompose unit labour cost into changes in the nominal wage and real labour productivity. The principal association is a strong positive relationship between inflation and nominal wages, while improvements in real labour productivity report only a relatively weak negative association with inflation. Supply‐side shocks also consistently report an association with inflation. As to demand‐side shocks, the output gap does not return a robust statistical association with inflation. Instead, it is growth in the money supply and government expenditure which return robust and theoretically consistent associations with inflationary pressure.     

Has Greater Competition Restrained U.S. Inflation?

This paper shows how increased goods market competition affects the behavior of inflation in a multisector economy. By raising the price elasticity of demand, increased goods market competition theoretically lowers inflation and makes the aggregate price level less sensitive to aggregate demand shocks. We find that proxies for the aggregate degree of goods market competition are statistically and economically significant in short-run Phillips curve models of core inflation. Evidence indicates that heightened goods market competition has flattened the slope of the short-run, expectations-augmented Phillips curve and slightly lowered the nonaccelerating inflation rate of unemployment (NAIRU).     

Multivariate model-based gap measures and a new Phillips curve for China

This paper examines empirically the Phillips curve relationship for the Chinese economy. We use quarterly data that go back to 1978 and employ a multivariate rather than univariate method in the construction of gap measures for inflation, money and output jointly with reliable error bands. Our empirical results show that the inflation gap and the output gap fit a New Phillips curve very well. We also find some structural change in the inflation–output trade-off.     

The gain from commitment in a two-country economy with inflation persistence

In recent years, the worldwide inflation rate appears to be converging to a low stable level. Moreover, the Phillips curve is flattening in many countries. These facts indicate that the output gap fluctuations associated with inflation persistence in one country influence other countries and suggest that the central bank consider the effect of inflation persistence on the real economy in an open economy framework. The objective of this paper is to explore optimal monetary policy in a two-country economy with inflation persistence. To consider the case in which inflation persistence is present in both countries, we assume that a fraction of firms that change their prices follows the rule-of-thumb pricing rule. In this case, the new Keynesian Phillips curve (NKPC) in each country becomes flatter as the fraction of firms employing the rule-of-thumb pricing rule increases in both countries. Our results show gains from commitment in a two-country economy with inflation persistence. This paper addresses that the presence of a severe deflationary bias is the main source of the large gain from a commitment policy in a two-country economy with inflation persistence.