Negative Inflation Target: Proposal of Non-Distortionary Monetary Policy Objective

2018 ◽  
Author(s):  
Tommm Frrmmel
Keyword(s):  
Monetary Policy ◽  
Inflation Target ◽  
Policy Objective

scholarly journals Negative Inflation Targeting: A Proposal of a Non-Distortionary Monetary Policy

2019 ◽  
Vol 22 (3) ◽  
pp. 336-356 ◽  
Author(s):  
Tomáš Frömmel
Keyword(s):  
Monetary Policy ◽  
Business Cycle ◽  
Inflation Targeting ◽  
Business Cycle Theory ◽  
Inflation Target ◽  
Policy Objective ◽  
Austrian Business Cycle Theory ◽  
Austrian Business Cycle ◽  
Growing Economy ◽  
The Business Cycle

This paper aims to propose a non-distortionary monetary policy objective consistent with the Austrian business cycle theory. Since the price level should fall in the growing economy in the Hayekian framework, introduction of a negative inflation target combined with the Taylor rule is suggested as a non-distortionary monetary policy. To keep the money stream stable, the optimal inflation target would be equal to the opposite of the growth rate of the economy. Such policy should lead to the smoothing of the business cycle path since monetary policy could be less activist compared to the current state of the positive inflation target. Possible criticisms of this suggestion are anticipated and addressed in this paper.

FINANCIAL STABILITY AND MONETARY POLICY REACTION FUNCTION FOR SOUTH ASIAN COUNTRIES: AN ECONOMETRIC APPROACH

2019 ◽  
pp. 1-30
Author(s):  
SAMIA NASREEN ◽  
SOFIA ANWAR
Keyword(s):  
Monetary Policy ◽  
South Asian ◽  
Financial Stability ◽  
Central Banks ◽  
Series Data ◽  
Reaction Function ◽  
Asian Countries ◽  
Policy Objective ◽  
Monetary Policy Reaction Function ◽  
Policy Reaction Function

This study empirically investigates a monetary policy reaction function for South Asian economies by incorporating financial stability as an additional policy objective in the central bank’s loss function. Empirical results are estimated by applying auto-regressive distributed lag (ARDL) approach to cointegration and vector autoregressive (VAR) approach using time-series data of five South Asian countries, namely, Pakistan, India, Bangladesh, Nepal and Sri Lanka. Estimated results indicate that monetary policy significantly reacts to the level of financial stability in all countries. The result further suggests that central banks would tighten monetary policy if output gap widens and exchange rate depreciate. In addition, central banks of Pakistan and India do not respond significantly to inflation gap.

Asset Price and the Optimal Monetary Policy: Model and Simulation

2011 ◽  
Vol 422 ◽  
pp. 466-469
Author(s):  
Hai Cheng Peng ◽  
Lu Li
Keyword(s):  
Monetary Policy ◽  
Asset Price ◽  
Price Volatility ◽  
Reaction Function ◽  
Optimal Monetary Policy ◽  
Policy Objective ◽  
Policy Model ◽  
Model And Simulation ◽  
Wide Range ◽  
Decision Making Model

The validity and merits of the monetary policy is reflected in the level of the attainment of its ultimate goal. We build up a decision-making model of central bank and deduce the optimal money supply reaction function of considering and ignoring asset price. In order to clarify the relationship between the optimal monetary policy and asset price volatility, we simulate the macroeconomic performance of optimal reaction function of considering and ignoring asset price in a wide range of monetary policy objective. We conclude that monetary policy should respond to volatility of asset price directly.

scholarly journals South African price changes and inflation since 1974: a note on the testing of inflation accuracy

2011 ◽  
Vol 11 (2) ◽  
pp. 229-246
Author(s):  
Jannie Rossouw ◽  
Vishnu Padayachee
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
South African ◽  
Inflation Targeting ◽  
Policy Framework ◽  
Inflation Target ◽  
Price Levels ◽  
Price Movements ◽  
Actual Price ◽  
Monetary Policy Framework

As inflation credibility in South Africa records low readings when measured in terms of inflation credibility barometers, this note aims at assessing whether actual price movements provide any grounds for low inflation credibility.  It compares the price movements of similar items with the rate of inflation over a period of 32 years, i.e. from 1974 to 2006, and discusses the use of an inflation accuracy indicator to compare estimated price levels adjusted by the rate of inflation and actual price levels.  Over the period of comparison no systematic over- or underreporting of changes in prices in terms of the rate of inflation could be detected and the analysis suggests that little or no basis can be found to justify low inflation credibility.  Inflation credibility is more likely than not influenced by the most recent purchasing experiences of consumers.  Doubts concerning the accuracy of inflation figures could nevertheless result in the general public concluding that monetary policy aiming at the achievement of an inflation target brings only the pain of high interest rates without the tangible benefits of lower inflation, thereby jeopardising the usefulness of an inflation-targeting monetary policy framework.

scholarly journals Robustly Optimal Monetary Policy with Near-Rational Expectations

2010 ◽  
Vol 100 (1) ◽  
pp. 274-303 ◽  
Author(s):  
Michael Woodford
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Optimal Policy ◽  
Rational Expectations ◽  
Stabilization Policy ◽  
Optimal Monetary Policy ◽  
Inflation Target ◽  
Model Consistency ◽  
Long Run

The paper considers optimal monetary stabilization policy in a forward-looking model, when the central bank recognizes that private sector expectations need not be precisely model-consistent, and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model-consistency. It is found that commitment continues to be important for optimal policy, that the optimal long-run inflation target is unaffected by the degree of potential distortion of beliefs, and that optimal policy is even more history-dependent than if rational expectations are assumed. (JEL C62, D84, E13, E31, E32, E52)

scholarly journals Monetary policy special features in the context of low interest rates

2020 ◽  
Vol 2 ◽  
pp. 50-64
Author(s):  
Kristina Nesterova ◽  
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Interest Rates ◽  
Price Level ◽  
Nominal Interest Rate ◽  
Inflation Target ◽  
Policy Rules ◽  
Monetary Policy Rules ◽  
Monetary Rules

Introduction. The paper considers a wide range of monetary policy rules: integral stabilization, NGDP targeting, price level targeting, raising the inflation target, introducing negative nominal interest rates etc. The author also considers discretionary policy used by central banks when the nominal rate is close to zero, such as dramatic preventive cut of the key interest rate and interventions in the open markets with the aim of cutting long-term interest rates. The relevance of this problem is supported by global long-term macroeconomic and demographic factors, such as the dynamics of oil prices and the aging of the population. The aim of the paper is to identify the most effective monetary policy rules in order to reduce the risk of a nominal interest rate falling to zero. Methods. Analysis of the background and the results of general equilibrium models modeling monetary policy is carried out. Analysis of the role of current global trends (based on statistics) in aggravating the problem of declining interest rates. Scientific novelty of the research. The author systematizes the conclusions of modern macroeconomic theory, which offers a number of monetary rules making it possible to reduce the likelihood of falling into the zero bound of interest rate. Results. The effectiveness of monetary rules such as targeting nominal GDP and price levels in preventing the nominal interest rate from falling to zero is shown, primarily due to more efficient public expectations management which is a weak point of discretionary intervention. Conclusions. Under the current global factors for many developed countries and some oil-exporters, the downward trend in nominal rates persists. Combined with slowdown in economic growth, such threat may have negative consequences for the Russian economy. In this case, it seems reasonable to stick to the inflation target above 2% per year and in the future to consider switching to targeting the price level or nominal GDP.

scholarly journals Correction of monetary policy under the influence of corona crisis and long-term factors

2021 ◽  
Vol 2021 (2) ◽  
pp. 65-92
Author(s):  
Tetiana Krychevska ◽  
◽  
Keyword(s):  
Monetary Policy ◽  
Fiscal Policy ◽  
Global Financial Crisis ◽  
Emerging Market ◽  
Macroeconomic Policy ◽  
Inflation Target ◽  
Structural Problems ◽  
Potential Gdp ◽  
Monetary And Fiscal Policy

The article shows the modification of monetary policy and modification of its interaction with fiscal policy in response to the challenges of the global financial crisis and the corona crisis, as well as reveals potential macroeconomic policy adjustments in response to long-term structural changes in the global economy. The specificity of the global financial and economic crisis, which was caused by financial intermediaries, and the belief in markets efficiency led to the dominance of monetary instruments in combating this crisis. However, purely monetary stimulus does not solve structural problems, and, acting with a very low degree of targeting, but on a huge scale, leads to the debt accumulation and financial crises. The corona crisis forced to resort to budget incentives to ensure targeted support for people and businesses and provided an impetus to discuss the ways to make better use of fiscal policy capacity to increase potential GDP and reduce inequality. The following potential long-term adjustments of macroeconomic policy are revealed: 1) increasing the emphasis on the interests of employees; 2) increasing the inclusiveness of monetary and fiscal policy; 3) the growing role of fiscal policy as an instrument of macroeconomic stabilization; 4) revision of the theory of monetary and fiscal policy interaction; 5) revision of the pre-emptive approach to anti-inflation policy, which means the reaction of monetary policy to deviations of the inflation forecast from the target, and the emergence of alternatives: response to the actual achievement and maintenance the inflation target for some time and compensation for the previous deviations from the inflation target; 6) modification of the optimal anti-inflationary policy in response to demand-pull inflation and cost-push inflation; 7) adjustment of the monetary policy in response to rising inflation due to the exhaustion of long-standing global disinflationary forces that have been in effect since the 1980s; 8) more active monetary and fiscal stimulus in emerging market economies.

scholarly journals The Monetary Policy Credibility Channel and the Amplification Effects in a Semi-structural Model

2020 ◽  
Vol 20 (201) ◽  
Author(s):  
Thitipat Chansriniyom ◽  
Natan Epstein ◽  
Valeriu Nalban
Keyword(s):  
Monetary Policy ◽  
Structural Model ◽  
Inflation Expectations ◽  
Extended Model ◽  
Inflation Target ◽  
Asymmetric Effects ◽  
Policy Frameworks ◽  
Integrated Policy ◽  
Policy Credibility ◽  
Central Bank Credibility

The paper extends a standard semi-structural model to account for nonlinear and asymmetric effects of monetary policy credibility. In our setting, central bank credibility is proportional to the deviation of inflation expectations from the announced inflation target, with positive deviations being more costly compared to negative ones. A loss in policy credibility as a result of shocks leads to a more persistent, backward-looking inflation process, and is associated with lower output. We find that the extended model with credibility effects matches well the key macroeconomic data over specific past episodes for Indonesia and Philippines and consider its adaptation to integrated policy frameworks as an area for further exploration.

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