The theory shows how monetary and fiscal policy work together to control inflation and stabilize government debt. If this coordination is not forthcoming, the price level cannot be determined and expectations are not anchored. This theory supports the notion that because IT forced policy makers to focus on a specific goal, expectations of inflation became better anchored.
Section 2 provides prime facie evidence that IT did indeed bring policy makers together in order to set the inflation target and implement policy to achieve the inflation target. This section briefly documents how inflation targeting IT is implemented in 14 countries that are labeled "emerging economies" by Ball The purpose is to highlight specific aspects of the policy that are common across the countries, as opposed to thoroughly documenting the history and implementation of IT.
Specifically, IT regimes have at least two things in common: increased transparency and a movement toward policy coordination. Section 3 shows the impressive success of IT in bringing down the rate of inflation in all 14 countries. Some countries, like Brazil, had rampant inflation prior to IT. While I do not perform any rigorous econometrics to test what factors were most important, the experiment was obviously a success.
The goal of this section is to document how each central bank describes IT in their own words in order to provide evidence of commonalities across countries. Each department gives presentations about topics that range from the level of current and projected inflation to trends in the macroeconomy.
If inflation breaches the target, the Governor of the Central Bank is required to write an open letter to the Minister of Finance explaining the reasons the target was missed, as well as the measures required to bring inflation back to the target, and the time period over which these measures are expected to take effect.
The IT reforms in Brazil have brought more policy institutions to the table to weigh in on economic objectives. The only publicly stated objective is the inflation target. From the CB's website:. The main merit of this regime is that, while it restricts the discretionary powers of the monetary authorities, it permits the achievement of stabilization policies.
An inflation-targeting regime establishes specific objectives, providing the Central Bank with the freedom to use the instruments and policies necessary to achieve this aim.
Communication with the public is optimized using a simple, easily understood indicator, which is able to strongly influence inflationary expectations. Monetary policy can also play a role in stabilizing output over the short term, as long as it is consistent with meeting the inflation target in the medium term.
The Central Bank's sole commitment is now to maintain inflation within the target range, as well as reflecting the authority's confidence in the market to determine autonomously the value of the national currency. In a highly volatile world of enormous openness to capital, maintaining a foreign exchange commitment is not only a difficult task, but also, as recent experience has taught, potentially very costly. A flexible approach to the foreign exchange rate eliminates this commitment, focusing Central Bank efforts on the inflation target, which becomes the nominal anchor for the economy, avoiding any possible confusion.
The leadership of the CBC consists of a board comprised of five members appointed by the President of the Republic with approval of the Senate.
The board is responsible for carrying out the stated IT goals along with "stability of the currency and normal functioning of internal and external payment systems. The Board of Directors sets the inflation target and consists of seven members with one vote each: the Minister of Finance, five full-time members and the General Manager of the Bank. The president of Colombia appoints two members every four years.
The Bank explicitly discusses how to achieve greater transparency with respect to setting policy. The Bank makes explicit use of its constitutional mandate to achieve and guarantee price stability-the prime objective of monetary policy.
The Bank announces the inflation targets with sufficient notice thereby enabling economic agents to take them into account in their decision making. The bank analyses various economic indicators and uses a wide variety of models with diverse foci statistical and forecasting, structural and simulation to strengthen further its ability for making economic forecasts. The Bank carries out sensitivity analyses for risk management.
It assesses changes in inflation forecasts under different domestic and international scenarios. The Bank interacts with other Central Banks and is open to the opinion of the national and international academic communities by means of organising and participating in seminars and forums dealing with subjects that are central to the Colombian and world economies.
The Bank organises periodical meetings with various sectors of Colombian society businessmen, employees, Congressmen, etc. In its policy of transparency, the Bank publishes reports explaining decisions on monetary policies, including a monthly inflation report. In addition to the reports mentioned above, in accordance with Law 31, Art. The report also covers the basic monetary and exchange rate policies during each period, including the level of international reserves and the Bank's financial situation.
Why and how the IT will be achieved plays a prominent role as well in these bi-annual meetings. The central bank of the Czech Republic CNB moved to a more transparent IT regime in with an emphasis on medium-run targets and an explicit public announcement of an inflation target or sequence of targets.
All Bank Board members are appointed by the President of the Czech Republic for a maximum of two six-year terms. In its monetary policy decision-making, the CNB Bank Board assesses the latest CNB forecast and evaluates the risks of non-fulfillment of this forecast.
Based on these considerations the Bank Board then votes on whether and how to change the settings of monetary policy instruments. By changing these instruments the central bank seeks to offset excessive inflationary or dis-inflationary pressures which are deviating future inflation from the inflation target or from the tolerance band around this target.
Inflation, or expected inflation, can, however, result from extraordinary shocks as a rule on the supply side whose inflationary or disinflationary effects unwind over a period of time. Any attempt to entirely offset these effects by changing the settings of monetary policy instruments would needlessly cause short-term fluctuations in the economy.
If the inflation forecast moves outside the inflation target tolerance band for a time due to such shocks, this is usually regarded under inflation targeting as an exemption from the central bank's objective of keeping inflation close to the target. The CNB like many other inflation-targeting central banks has adopted this practice and in justified situations works with "caveats", i. In the inflation targeting regime, the need for escape clauses derives from the occurrence of large shock changes in exogenous factors particularly supply-side shocks that are completely or largely outside the purview of central bank monetary policy.
Attempts to keep inflation on target in these circumstances might cause undesirable volatility of output and employment. If such a shock deflects projected inflation from the target, the CNB does not respond to the primary impacts of the shock. It will apply an exemption escape clause from the obligation to hit the inflation target and accept the temporary deviation of the inflation forecast and consequently also future inflation from the target caused in this way.
There is a whole range of shocks which can create room for applying such escape clauses. Changes to indirect taxes are one such shock. The central bank of Hungary MNB states as its "primary statutory objective" to achieve and maintain price stability. IT was adopted in and the process of achieving an inflation target is described as follows:. The MNB can meet its inflation target by changing the central bank base rate to an appropriate extent and pace. In Hungary, setting the key policy rate is the responsibility of the Monetary Council, the MNB's supreme decision-making body.
The Council convenes as required by circumstances, usually twice but at least once a month, according to a pre-announced schedule. From the meetings one is a rate-setting meeting each month. The Council sets interest rates by a simple majority vote of members present. In the event of a tie, the Governor of the MNB has a casting vote. In case the Governor is prevented from voting, the Deputy Governor has a casting vote.
The Council issues a statement explaining the reasons behind its action on the day of the interest rate decision. Abridged minutes of the Council's rate-setting meetings are released regularly, before the next rate-setting meeting takes place.
The aim of the minutes is to lend higher transparency to the monetary policy decision-making process and provide economic agents with a deeper insight into the Council's evaluation of current economic conditions. Publishing the individual votes makes decision-makers accountable in respect of their contribution to the fulfillment of the mandate of price stability defined by Parliament. The MNB's website also contains a thorough discussion of the transmission mechanisms of monetary policy.
One section discusses the importance of inflation expectations. The expectations channel has a key role in modern central banking. One explanation for this is that it is not only the central bank's current interest rate decisions, but also its expected behaviour, which may influence developments in the real economy and inflation.
If the central bank has a sufficiently credible commitment to price stability, then economic agents will take their price and wage-setting decisions in the expectation that it is the central bank's target which will drive the medium-term outlook for inflation. In this case, inflation expectations are said to be "anchored", which is indispensable for maintaining price stability and makes it much easier for the central bank to bring inflation back to target, should an adverse shock occur.
IT was formally adopted in and replaced the crawling exchange rate system as the nominal anchor for monetary policy. The target is set by Government officials in a Memorandum of Understanding between the Government and Bank Indonesia, the inflation target is established for three year period in a Decree of the Minister of Finance KMK.
The implementation of IT, as explained by the Bank Indonesia, emphasizes the importance of setting a target that is easily understood by the public. It describes the process accordingly:. The Bank Indonesia announces future inflation targets for specific periods.
During each period, Bank Indonesia will evaluate whether the inflation projection is on track with the adopted target. This projection employs a number of models and various information depicting future inflation conditions.
If the inflation projection is no longer compatible with the target, Bank Indonesia then responds with the instruments at its disposal. For example, if the inflation projection overshoots the target, Bank Indonesia will adopt a tight bias monetary policy.
Bank Indonesia issues regular explanations to the public on the assessment of inflation conditions, the future outlook and decisions taken. If the inflation target is not reached, an explanation must be provided to the public and measures taken to put inflation back on course for its target.
With an explicit inflation target, the public will understand the direction of inflation. In contrast, when a base money target is employed, the public has greater difficulty in understanding the future direction of inflation, especially if the linkage with inflation is unclear.
The ITF focuses on inflation as the monetary policy priority, in keeping with the mandate vested in Bank Indonesia. The ITF is forward looking, as appropriate to the time lag for policy to have impact on inflation. The ITF strengthens the transparency and accountability of monetary policy and in so doing boosts monetary policy credibility. Transparency, accountability and clarity of objectives form part of the good governance of a bank vested with independence.
The ITF does not require an assumption of stability in the relationship between money supply, output and inflation. Acknowledgements and Disclosures. Alan J. Auerbach, the Robert D. The credible estimation of causal effects is a central task of applied econometrics. The main policy challenge brought about by fiscal dominance is that monetary policy is constrained by its effect on public finances, especially when the debt dynamics is considered unsustainable.
The experiences of Brazil and Turkey are particularly interesting in this regard. Both countries went through periods of fiscal retrenchment as the cornerstones of macroeconomic adjustment and disinflation. Concern about the sustainability of the public debt often resulted in confidence crises, as in the case of Brazil in , which called for decisive action by the monetary authorities.
The case of Indonesia is also illustrative of the challenges posed by substantial capital inflows in the course of disinflation. Supply side considerations also pose challenges for IT in emerging market economies. Structural reform also often creates one off inflation shocks that need to be dealt with by the central bank.
This is the case of changes in price setting that are related to overall economic liberalisation following central planning, as in the case of the Czech Republic, for example. It is also the case of supply bottlenecks and distribution hurdles in Indonesia. This issue has nevertheless not yet been resolved in some countries. The targeted inflation indices have also changed over time in some countries, including the Czech Republic and Indonesia, for example.
One aspect of this is the choice between a core inflation index versus a headline inflation index. This is an issue all central banks have to face. The US Federal Reserve focuses on core inflation because in the United States this measure has proved to be a better predictor of future headline inflation. By contrast, the European Central Bank focuses on headline inflation, and there is evidence that in the euro area headline inflation is a better predictor of future inflation.
The main advantage of using a measure of core inflation is that it is less affected by temporary supply shocks, which can be particularly large in emerging economies. On the other hand, a core measure may be unrepresentative of increases in the cost of living, so that its calculation may not be credible in the eyes of the public. Headline inflation does indeed better reflect cost of living increases, and perhaps does dominate the public's inflation expectations.
In emerging economies, matters are further complicated by the fact that food prices and administered prices have a greater weight in the consumer price index than they do in industrial countries.
The issue of adjustments in administered prices during a transition period of rapid structural change was addressed in the Czech Republic by targeting an inflation measure net of administered prices until Another difficulty is that rapid structural change can lead to large changes in relative prices. The experience of central European economies is again instructive. As the Polish and Hungarian economies became more market-oriented and were integrated into the global economy, the prices of non-tradable goods and services rose much faster than those of tradable goods.
Another aspect is the time horizon over which the inflation target is to be achieved. The target horizon should match the length of the lags in the monetary policy transmission mechanism. If the target horizon is too short, the inflation target can easily be missed following shocks. This risks damaging the credibility of the policy framework, and may lead to excessive output volatility. Inflation targets can have annual, multi-year, or indefinite horizons.
They can also be required to be satisfied on average over a business cycle, as for example in Australia. It is also entirely possible to countenance missing a target due to circumstances beyond the control of the central bank, provided that the reasons for temporarily large deviations in inflation from target are well communicated to the public.
The second strategic choice concerns the role of macroeconomic forecasts. A particular challenge is the production of inflation forecasts. Developing techniques to produce reliable forecasts of inflation helps to nurture public confidence in the professionalism of the central bank's inflation assessment. In addition, devoting analytical resources to rigorous macroeconomic assessment helps the central bank to better understand the different channels of the monetary policy transmission mechanism.
It can give policymakers new information about the length of the lags in monetary transmission. This in turn helps the central bank to choose the right horizon of the inflation target.
Producing inflation forecasts in emerging economies faces particular challenges. Let me highlight several. Exchange rates are inherently not very predictable. Since they have a greater effect on emerging economies, inflation forecasts in emerging economies could be less accurate and more volatile than in industrial countries.
In addition, economic and financial shocks tend to be larger, and structural changes can make the estimation of statistical models difficult.
Moreover, the links between the policy interest rate and bank lending rates may be weaker. Finally, economic data may be available in a less timely manner. Central banks in emerging economies may therefore have to apply more judgment in generating inflation forecasts.
It may also be useful to emphasise the uncertainty surrounding the forecasts, as is also done in many industrial countries, to help avoid the danger of a loss of credibility if outturns are very different from forecasts. How sophisticated does the publication of inflation forecasts have to be? This was much debated at a meeting of central bank governors from Africa and several other regions held at the BIS last year.
0コメント