Inflation Targeting - the Holy Grail of Monetary Policy?

Inflation targeting is a statement about the objective of central bank policy and not about operating procedures. Its success depends not only on the actions of the central bank, but requires a broad consensus concerning the proper role of monetary policy in the economy. It also requires the backing of a sound fiscal policy. As countries differ both in economic structure and monetary transmission mechanism, the implementation of inflation targeting must be country specific. Instability over time in the transmission mechanism also implies that inflation targeting strategies must evolve to avoid the fate of previous monetary policy targeting practices.     

通货膨胀目标制度在我国实施的可行性分析

20世纪90年代以来,由于通货膨胀目标制(Inflation Targeting,以下又简称通胀目标制)被越来越多的国家采用,使得通胀目标制成为近年西方货币经济学领域最热门的研究课题之一。从传统的以控制货币供应量为主的货币目标法(Monetary'Targeting)和以稳定汇率为主的汇率目标法(Exchange rate Targeting)到明确公布通货膨胀目标的通胀目标制是一个货币政策方面的重大转变。本文主要分析了我国实施通胀目标制的可行性,并提供相关的政策建议。     

The optimal choice of monetary policy instruments in a small open economy

Abstract.  This paper studies how the nature of shocks affects the optimal choice of monetary policy instruments in a small open economy. Three classic rules, fixed exchange rates, monetary targeting, and inflation targeting are studied and ranked by comparing with the optimal monetary policy under commitment. We find that the ranking of the simple rules can be mapped to the terms-of-trade variability that the rule allows relative to what a particular shock optimally calls for. It turns out that inflation targeting dominates the other two rules under productivity or velocity shocks, whereas monetary targeting is the best performer under fiscal shocks.     

The effects of the monetary policy regime shift to inflation targeting on the real interest rate in the United Kingdom

This paper studies the effects of the monetary policy regime shift to inflation targeting on the stochastic properties of the real interest rate in the U.K. The empirical analysis suggests a constant mean of the real interest rate that shifts with the monetary policy regime change to inflation targeting in October 1992. The mean-reverting level of the real interest rate has decreased from 5.1% to 2.3% per annum with the change in monetary policy to inflation targeting. In addition, the shift in monetary policy regime to inflation targeting has reduced the volatility of the real interest rate and increased the persistence of real interest rate deviations from the mean. The results suggest that the central bank can affect the stochastic properties of the real interest rate through the choice of monetary policy regime over a long period of time.     

Financial market imperfections and monetary policy strategy

In a model with imperfect money, credit and reserve markets, we examine if an inflation-targeting central bank applying the funds rate operating procedure to indirectly control market interest rates also needs a monetary aggregate as policy instrument. We show that if private agents use information extracted from money and financial markets to form inflation expectations and if interest rate pass-through is incomplete, the central bank can use a narrow monetary aggregate and the discount interest rate as independent and complementary policy instruments to reinforce the credibility of its announcements and the role of inflation target as a nominal anchor for inflation expectations. This study shows how a monetary policy strategy combining inflation targeting and monetary targeting can be conceived to guarantee macroeconomic stability and the credibility of monetary policy. Friedman's k-percent money growth rule, which can generate dynamic instability, and two alternative stabilizing feedback monetary targeting rules are examined.     

OPTIMAL MONETARY POLICY WITH THE STICKY INFORMATION MODEL OF PRICE ADJUSTMENT: INFLATION OR PRICE‐LEVEL TARGETING?

I investigate the optimal monetary policy in a New Keynesian macroeconomic framework with the sticky information model of price adjustment. The model is solved for optimal policy, and welfare implications of three alternative monetary policy regimes under this optimal policy are compared when there is a cost‐push shock to the economy. These monetary policy regimes are the unconstrained policy, price‐level targeting and inflation targeting regimes. The results illustrate that optimal policy depends on the degree of price stickiness and the persistence of the shock. Inflation targeting emerges as the optimal policy if prices are flexible enough or the shock is persistent enough. However, the unconstrained policy or price‐level targeting might be preferable to inflation targeting if prices are not very flexible and the shock is not very persistent. The results also show that as prices become more flexible, the welfare loss usually gets bigger.     

The transition of China's monetary policy regime: Before and after the four trillion RMB stimulus

This paper studies the monetary policy of China in a flexible time-varying parameter vector autoregression model with stochastic volatility, with a focus on the monetary policy regime change around 2009 when the four trillion RMB stimulus started. We find that China has been transiting from targeting money quantity to targeting interest rate since 2009. The interest rate policy instrument played a bigger role in the central bank's monetary policy toolbox. We check an alternative identification strategy and a couple of different model settings to show the robustness of this conclusion.     

Asymmetric monetary policy rules in Australia

In this study, the hypothesis that the Reserve Bank of Australia (RBA) implements an asymmetric monetary policy rule is tested. We estimate both linear and asymmetric monetary policy reaction functions for the period before inflation targeting was adopted, for the period when inflation targeting was explicitly adopted and for the full sample period. The results of the linear monetary policy rules are consistent with the estimates reported from other studies that estimate linear monetary policy rules for Australia. On the other hand, the results of estimating the asymmetric monetary policy rules for the pre-inflation targeting period shows that the RBA had reacted symmetrically, suggesting that it had acted with the same aggressiveness towards both inflation and output gaps of the same magnitude, over both phases of the business cycle. However, for the inflation targeting period, the results show that the RBA had reacted asymmetrically in its policy response to the inflation gap, output gap or both. A similar result is found for the full sample period. This asymmetric response supports the view that a non-linear monetary policy rule emanated from asymmetric preferences, rather than from the existence of a non-linear Phillips curve.     

中国实行通货膨胀目标制的可行性分析

通货膨胀目标制是一种以保持低而稳定的通货膨胀为首要目标的货币政策框架。本研究参照IMF提出的相关指标,并考虑到中国作为转型国家的经济特征,从中国当前经济运行中控制一般物价水平的必要性、经济结构的完善性、金融市场和银行体系的健全性、中央银行的独立性、货币政策的透明度以及央行准确预测通货膨胀的技术等方面考察了中国实行通货膨胀目标制的可行性,得出中国已经初步具备实施该货币制度的条件。并提出更彻底的制度改革将会确保中国成功实施通货膨胀目标制,从而使得宏观经济运行处于稳定的价格水平因而更有效率。     

Optimal choice of monetary policy instruments under velocity and fiscal shocks

This paper, in the spirit of Poole [Poole, William, 1970. The Optimal Choice of Monetary Policy Instruments in a Simple Macro Model. Quarterly Journal of Economics, 84, 192–216.], studies how differently monetary and fiscal shocks influence the appropriate choice of the monetary policy regime. Velocity shocks are introduced by embedding a stochastic cash-in-advance constraint within the New Keynesian framework. In addition to optimal policy under discretion, three classic rules, interest rate targeting, monetary targeting, and the Taylor rule are ranked under both fiscal and velocity shocks. The non-stationarity of prices under the Taylor rule makes it inferior to the other rules under which prices are stationary. Monetary targeting, by stabilizing aggregate demand under fiscal shocks, outperforms interest rate targeting, while the latter provides a better insulation against velocity shocks. Monetary targeting (under fiscal shocks) and interest rate targeting (under velocity shocks) even outperform the optimal policy under discretion for sufficiently high intertemporal elasticities of consumption substitution.     

What is the right balance between US monetary and fiscal policy? Explorations using simulated wavelet-based optimal tracking control

This paper uses wavelet-based optimal control to simulate fiscal and monetary strategies under different levels of policy restrictions. The model applies the maximal overlap discrete wavelet transform to US quarterly GDP data and then uses the decomposed variables to build a large 80-dimensional state-space linear-quadratic tracking model. Using a political targeting design for the frequency range weights, we simulate jointly optimal fiscal and monetary policy where: (1) both fiscal and monetary policy are dually emphasized, (2) fiscal policy is unrestricted while monetary policy is restricted to achieving a steady increase in the market interest rate, (3) only monetary policy is relatively active, while fiscal spending is restricted to achieving a target growth rate, and (4) monetary policy emphasizes short-run stabilization, while fiscal policy utilizes political cycle targeting. The results show that fiscal policy must be more aggressive when the monetary authorities are not accommodating the fiscal expansion and that the dual-emphasis policy leads to a series of interest rate increases that are balanced between a steadily increasing target and a low, fixed rate. This research is the first to construct integrated fiscal and monetary policies in an applied wavelet-based optimal control setting using US data.     

The role of exchange rate in inflation targeting: the case of Turkey

ABSTRACT

The role of the exchange rates in emerging market economies that have adopted inflation targeting (IT) is a critical and contentious issue in the relevant literature. This article investigates whether an exchange rate-augmented Taylor rule describes the Central Bank of Republic of Turkey’s (CBRT) monetary policy. Covering the period from 2002:1 to 2017:8 it also explores possible nonlinearities in the reaction function of the CBRT by employing a Threshold Vector Autoregressive (TVAR) model. The linear estimation of the model highlighted the importance of the exchange rate in monetary policy under IT. The results of the nonlinear model indicate that the stance of monetary policy was asymmetric with respect to exchange rate movements during the conventional IT period. However, the asymmetric monetary policy stance disappeared in the aftermath of the Global Financial Crisis. Increasing considerations of financial stability undermined the asymmetric policy stance of the CBRT in the post-crisis period.     

The effects of fiscal spending shocks on the performance of simple monetary policy rules

We examine the effects of fiscal shocks on the performance of alternative monetary policy rules in a small dynamic general equilibrium framework. We explicitly consider the interaction between fiscal and monetary policy rules which may be present in the real world. We use a simple specification for the fiscal policy rule and various specifications for the (simple) monetary policy rule. Our analysis suggests that some form of flexible inflation targeting regime would perform well in response to fiscal shocks compared to other forms of policy regimes.     

Does money have a role in the inflation process? Evidence from Australia

Inflation, defined as a sustained increase in the price level, is considered a monetary phenomenon, as it can be explained within the framework of money‐demand and money‐supply relationships. In the extant literature, money growth is shown to remain causally related to inflation across countries and over time, irrespective of the exchange rate regime and stability of the money‐demand function. Nevertheless, emerging literature suggests a diminishing role of money in the conduct of monetary policy for price stability, especially under inflation targeting. Monetary policy in Australia under inflation targeting since 1993 is an example of policy that denies a relationship between money growth and inflation. The proposition that money does not matter insofar as inflation is concerned seems odd in both theory and the best‐practice monetary policy for price stability. This paper uses annual data for the period 1970–2017 and quarterly data for the period 1970Q1–2015Q1. It deploys both the Johansen cointegration approach and the autoregressive distributed lag (ARDL) cointegration approach to investigate for Australia whether money, real output, prices and the exchange rate (non‐stationary variables) maintain the long‐run price‐level relationship that the classical monetary theory suggests in the presence of such stationary variables as the domestic and foreign interest rates. As expected, the empirical findings for Australia are consistent with the classical long‐run price‐level relationship between money, real output, prices and the exchange rate. The error‐correction model of inflation confirms the presence of a cointegral relationship among these variables; it also provides strong evidence of a short‐run causal relationship between money supply growth and inflation. On the basis of a priori theoretical predictions and empirical findings, the paper draws the conclusion that the monetary aggregate and its growth rate matter insofar as inflation is concerned, irrespective of the strategy of monetary policy for price stability.     

Inflation targeting and financial stability in emerging markets

This paper aims at investigating whether emerging market inflation targeters are more financially vulnerable than their non-targeting counterparts. It further assesses the extent to which targeting central banks are less responsive to financial imbalances, compared to those implementing alternative policy strategies. Based on a sample of 26 emerging countries, including 13 targeters, the analysis suggests that monetary policy in targeting countries is relatively more sensitive to financial risks. However, despite stronger central banks’ responses to financial imbalances, the financial sector appears to be more fragile for targeters. Our conclusion therefore challenges the view that central banks, through their policy interest rates, can guarantee the stability of the financial system. It rather suggests that the control of inflation should remain the primary monetary policy objective, while a (macro)prudential authority would be in charge of the financial stability objective.     

通货膨胀目标制并不能解决我国货币政策低效率问题——一个基于政策时滞和扰动冲击的研究

本文在一个引入时滞、政策传导扰动和中介目标的货币政策模型中，分析了通货膨胀目标制的实施与货币政策效率之间的关系。我们发现，由于货币政策的时滞和货币政策传导机制的不畅，中央银行无法及时地对经济中的扰动做出正确的估计，尽管可以利用中间目标变量和其他参考变量的实际值对目标值的偏离所给出的信息来适当调整货币政策，但仍然无法对冲击及时做出正确的响应；再加上中央银行货币政策执行中的财政占优、金融占优和外部占优问题，使得中央银行无法执行其意愿的政策，因此通货膨胀目标制的引入无助于解决货币政策的低效率问题。     

OVERVALUED: SWEDISH MONETARY POLICY IN THE 1930s

The article discusses Sweden's monetary policy in the 1930s, which has been hailed as the first and only example of successful price‐level targeting. Our contribution is twofold. First, we argue that the crucial measure that immediately ended deflationary expectations and enabled a swift recovery was a strong and involuntary devaluation of the currency, not the adoption of a new monetary policy framework. Second, starting from the recent literature on monetary policy at the zero‐lower bound, we conclude that Sweden's exchange rate policy is more relevant for the current discussion than its tentative experience with price‐level targeting.     

中央银行独立性、责任性与通货膨胀目标制

近年来不少学者提出,我国货币政策应转向通货膨胀目标制。我国现行的政策实际上正是一种隐性的通货膨胀目标制,20世纪90年代以来所发生的几次通货膨胀偏倚很大程度上是由于央行的独立性不够。鉴于通货膨胀目标制并不能解决当前我国货币政策调控中的问题并可能带来更多的问题,今后货币政策改革应坚持由直接调控向间接调控、由数量型调控向价格型调控的转变思路,在提高央行独立性的同时,增强其责任性并提高货币政策的透明度。     

Multiple Wage Bargaining Systems in the Single European Currency Area

Little attention in the EMU literature has been paid to the interaction between centralbank monetary rules and systems of collective wage bargaining. Analytically andempirically, coordinated wage bargaining systems respond with real wage restraintto non-accommodating monetary policy. Since wage determination is dominated bycollective bargaining in all the EMU member states and wage coordination within themember states has grown since 1980, this is a topic of potential importance. In particular, the replacement of the Bundesbank, directly targeting German inflation, by an ECB targeting European inflation has removed a major institutional support of wage restraint in Germany. The consequences of this for EMU are worked out under two scenarios, that inflation expectations will be generated by ECB monetary policy and that they will reflect German inflation outcomes. Possible institutional developments are discussed including government-union bargains. The Bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in Germany: again its replacement by the ECB – targeting (if at all) European rather than German fiscal policy – loosens fiscal constraints. For underlying structural reasons therefore, it is possible that Germany and other EMU countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations.