Measuring trend inflation in India

Central to monetary policy is the concept of trend inflation to which actual inflation outcomes are expected to converge after short run fluctuations die out. Accordingly, the inflation target needs to be fixed in alignment with trend inflation to avoid unhinging inflation expectations and flattening the aggregate supply curve or imparting a deflationary bias to the economy. Results from a regime switching model applied to a hybrid New Keynesian Philips curve suggest a steady decline in trend inflation since 2014 to 4.1–4.3 per cent just before COVID-19 struck. This points to maintaining the inflation target at 4 per cent for India.     

Inflation targeting and inflation persistence in Asia–Pacific

Following the Asian financial crisis in 1997–1998, a number of regional central banks adopted inflation targeting. While it is possible for the average inflation rate to be close to target, deviations of inflation could nevertheless be large and protracted. We therefore explore how successful this framework has been by looking at the persistence of inflation, as measured by the sum of the coefficients in an autoregressive model for inflation, using a median unbiased estimator and bootstrapped confidence bands. We find that persistence tends to decline following the adoption of inflation targeting. The speed by which persistence falls varies across countries. Interestingly, the economies not adopting inflation targeting show a smaller decline in persistence. Overall, we conclude that inflation targeting has performed well in Asia.     

Optimal Monetary Policy Rules and Inflation Targets: Are Australia,Canada, and New Zealand Different from the U.S.?

Outwardly, the central banks of Australia, Canada, New Zealand, and the U.S. follow somewhat different approaches to controlling inflation. The U.S. does not explicitly target inflation while the other countries do. Canada and New Zealand have target bands for inflation while Australia has a point target. Results in this paper nevertheless find broad similarities in the monetary policies of these countries. Each can be described as having pursued optimal inflation targeting (explicit or implicit), with heavy interest rate smoothing, but perhaps placing little weight on output variability. We argue that interest rate smoothing is used to introduce gradualism into the response of monetary policy to inflation. We show that given heavy interest rate smoothing, a concern for output variability is redundant.     

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.     

DO INTERNATIONAL MONETARY FUND PROGRAMS IMPACT ON THE SACRIFICE RATIO?

From time to time, the International Monetary Fund (IMF) makes resources available to member states for short‐term balance‐of‐payments support under an agreed arrangement know as a program. Most IMF programs include quantitative performance criteria for key macroeconomic variables, which borrowers must meet to obtain Fund resources. Standard open economy models predict that if policymakers are able to credibly commit to reducing inflation, rational economic agents will lower their expectations of inflation and, therefore, the trade‐off between inflation and output will fall. The present study tests whether IMF programs, by lending credibility to a country's adjustment program, influence the inflation–output trade‐off. The results from the study suggest that IMF programs do not significantly influence the inflation–output trade‐off. This finding is robust to changes in the estimation approach, the method used to obtain the output gap estimates and outliers.     

Inflation Targeting in ASEAN‐10

The paper addresses the empirical question of whether economies that do not systematically target inflation (non‐inflation targeters) experience higher exchange rate volatility as compared with inflation targeters in 10 countries of the Association of Southeast Asian Nation (ASEAN) from 1990 to 2010. The paper examines the role of real exchange rate, exchange rate volatility and the reaction functions of central banks using dynamic panel estimation techniques. The results indicate that the output gap offers more useful information than the inflation gap in setting interest rates for inflation targeters, implying that the real term is more important than the nominal term. In turn, this suggests that an increase in interest rate can be wielded swiftly to reduce real gross domestic product and suppress inflation. The real exchange rate appears as a weaker determinant in setting interest rates for non‐inflation targeters. Inflation targeters experienced lower exchange rate volatility compared with non‐targeters in the ASEAN, which implies that implementation costs to their domestic economies may be marginally lower. Meanwhile, the non‐targeters follow a mixed strategy as both the inflation and real exchange rate are used as instruments to set the interest rates.     

Inflation and Inflation Expectations in South Africa: an Attempt at Explanation

This paper examines the relationship between inflation and inflation expectations in South Africa. We use inflation expectations derived from the quarterly surveys conducted by the Bureau of Economic Research from 2001Q1 to 2011Q4 . Using these data, we estimate the model assuming that private sector expectations are a linear function of the inflation target and lagged inflation. The results indicate that economic agents' expectations largely depend on lagged inflation. This suggests that the South African Reserve Bank (SARB) has not been successful in anchoring expectations of the private sector since the adoption of the inflation targeting (IT) regime in 2000. We also find evidence indicating that the SARB's implicit inflation target lies above the upper bound of the official IT band. Finally, it appears that the SARB has been more concerned about output stabilisation than inflation stabilisation.     

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.     

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.     

汇率制度虚报与中国的选择

汇率制度虚报是指公开宣称浮动汇率制度,但实际实行固定汇率制度的国家行为。这一现象在新兴市场经济体(包括中国)中很普遍。本文探讨了汇率制度虚报本身对经济发展正向效应的机制。文章指出,对于中国,公开宣称浮动汇率制度是争取主动权以应付可能的投机资本冲击,而操作层面的固定汇率制度是出于稳定通胀预期考虑的最优选择。文章进一步指出,这种虚实结合的汇率制度选择不应成为美国攻击人民币的借口。     

International deflation risks under alternative macroeconomic policies

We use a version of the Global Projection Model covering the United States, Euro area and Japan to assess options for dealing with the looming risk of international deflation. The zero floor to interest rates constrains monetary policy. Confidence intervals, derived from stochastic simulations, indicate ranges of uncertainty. The results suggest a high probability of a declining price level for a couple of quarters in 2009. Suitable policy adaptations reduce the risk that this might turn into a prolonged, global deflation. These include: a price level path target for monetary policy, which would respond to previous, as well as expected, shortfalls from the desired inflation rate; a more stimulative fiscal policy; and an increase in the long-run target for inflation.     

Is 2?% the optimal inflation rate for the Euro Area?

According to the relevant literature, monetary policy implications concerning the optimal inflation rate can be derived by examining the relationship between inflation and the Relative Price Variability (RPV). This paper studies this issue for selected Euro Area (EA) countries, using monthly data for the Harmonized Index of Consumer Prices. In particular, semi-parametric estimations are employed so as to find the accurate form of the inflation-RPV relationship. The results indicate that this relationship exhibits a U-shape functional profile. Furthermore, the optimal inflation rates for the EA, France, Germany and Spain are also calculated. For all countries and the EA, we find that although the European Central Bank’s “below but close to 2?%” inflation target is optimal for the EA average, it is not the optimum inflation rate for the individual counties.     

Central Bank Credibility before and after the Crisis

A new measure of credibility is constructed as a function of the differential between observed inflation and some estimate of the inflation rate that the central bank targets. The target is assumed to be met flexibly. Credibility is calculated for a large group of both advanced and emerging countries from 1980 to 2014. Financial crises reduce central bank credibility and central banks with strong institutional feaures tend to do better when hit by a shock of the magnitude of the 2007-2008 financial crisis. The VIX, adopting an inflation target and central bank transparency, are the most reliable determinants of credibility. Similarly, real economic growth has a significant influence on central bank credibility even in inflation targeting economies.     

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.     

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.     

Optimal inflation target under uncertainty

We derive an optimal state-contingent inflation target in an economy under uncertainty. This inflation target can improve inefficiencies stemming from two sources: the lack of commitment to predetermined policies and the lack of coordination between the monetary and fiscal authorities. We then discuss the pros and cons of our proposal compared with the solution proposed by Beetsma and Bovenberg [Beetsma, R.M.W.J., Bovenberg, A.L., 2001. When does an inflation target yield the second best? Scandinavian Journal of Economics 103, 119–126], paying special attention to their practical feasibility. We will show that in some countries where there is a highly independent central bank, our proposal is more attractive.     

Inflation Forecast Targeting: An Alternative Approach to Estimating the Inflation‐Output Variability Tradeoff

We suggest a new way of computing the inflation‐output variability tradeoff under inflation forecast targeting. Our approach is based on dynamic, stochastic simulations of the average inflation rate over a two‐year horizon using the moving average representation of a vector autoregressive (VAR) model. Using real‐time data over two samples, we estimate the inflation‐output variability tradeoff for the United States and show that it has shifted favorably over time. We analyze the policy interventions required to achieve target inflation in each sample and compare these interventions over time.     

西方国家货币政策中介目标的历史演进及其启示

西方国家的货币政策中介目标经历了从贷款量、利率到货币供应量再到目前以利率为主要调节目标,多信息变量并重的格局。当前流行的通货膨胀目标制事实上是将传统中介目标功能分离、分散于多个变量,而又以利率为主要中间调节目标的货币政策框架。     

Bailouts,Inflation, and Risk-Sharing in Monetary Unions

This paper presents a new rationalization for bailouts of sovereign debt in monetary unions, such as those observed during the recent Euro crisis. It introduces a model where member countries of the monetary union are ex-ante identical, and each derives utility from consumption and disutility from the union-wide inflation rate. The union’s central bank is utilitarian and lacks commitment. Countries borrow or save in a market for nominal sovereign debt in response to idiosyncratic income shocks, with countries that receive positive income shocks saving and countries that receive negative income shocks borrowing. Ex post, the monetary union’s central bank will attempt to devalue sovereign debt through surprise inflation, as this will redistribute income from rich creditor countries to poor debtor countries. Creditor countries choose to bailout debtor countries because bailouts will weaken the redistributive motives of the central bank and forestall surprise inflation. As bailouts in this environment constitute a payment from lucky creditor countries to unlucky debtor countries, they mimic a risk-sharing arrangement that insures against income shocks. The payments made by creditor countries are incentive-compatible due to the shared currency and inflation rate in the monetary union. This ability of countries to provide each other with incentive-compatible insurance constitutes a novel theory of optimal currency areas. This insurance benefit of the monetary union is largest for countries with negatively correlated income shocks, in contrast to the classic Mundell-Friedman optimal currency area criterion.