inflation differentials
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2020 ◽  
Vol 20 (17) ◽  
Author(s):  
Nicolas End ◽  
Mariam El Hamiani Khatat ◽  
Rym Kolsi

In this paper, we argue that inflation targeting could be the future of Tunisia’s monetary policy. Monetary targeting has proven to be ineffective due to the composition of reserve money, structural liquidity deficit, and higher instability of the money multiplier after 2010. Exchange rate targeting is no longer feasible due to the level of international reserves, current account deficit, and inflation differentials with main trading partners. The Central Bank of Tunisia has already made important progress toward inflation targeting. The paper evidences the existence of increasingly effective interest rate transmission as well as the changing exchange rate passthrough to inflation with the gradual move toward further exchange rate flexibility.


foresight ◽  
2019 ◽  
Vol 21 (2) ◽  
pp. 216-226
Author(s):  
Tobias Rötheli

Purpose This study aims to address the issue of prediction of inflation differences for an economy that considers either fixing its exchange rate or joining a currency union. In this setting, individual countries have limited control over their inflation, and anticipating the possible course of domestic inflation relative to inflation abroad becomes an important input in policy-making. In this context, the author compares simple forecast heuristics and econometric modeling. Design/methodology/approach The study compares two basically different approaches. The first approach of forecasting consists of simple heuristics. Various heuristics are considered that differ with respect to the economic reasoning that goes into quantifying the forecast rules. The simplest such forecasting heuristic suggests that the average over all available observations of inflation differentials should be taken as a predictor for the future. Bringing more economic insight to bear suggests a further heuristic according to which historical inflation differentials should be adjusted for changes in the nominal exchange rate. A further variant of this approach suggests that a forecast should exclusively rely on data from earlier times under a pegged exchange rate. A fundamentally different approach to prediction builds on dynamic econometric models estimated by using all available historical data independent of the currency regime. Findings The author studies three small member countries of the Eurozone, i.e. Finland, Luxembourg and Portugal. For the evaluation of the various forecasting strategies, he performs out-of-sample predictions over a horizon of five years. The comparison of the four different forecasting strategies documents that the variant of the forecast heuristic that draws on data from earlier experiences under fixed exchange rates performs better than the forecast based on the estimated econometric model. Practical implications The findings of this study provide helpful guidelines for countries considering either joining a currency union or fixing their exchange rate. The author shows that a simple forecasting heuristic gives sound advice for assessing the likely course of inflation. Originality/value This study describes how economic theory can guide the selection of historical data for assessing likely future developments. The analysis shows that using a simple heuristic based on historical analogy can lead to better forecasts than the analytically more sophisticated approach of econometric modeling.


2017 ◽  
pp. 1-24
Author(s):  
PAK HUNG MO

The focus of this paper is to examine the effects and mechanism of government expenditures (GEs) in determining the long-term inflation differentials across countries. For this purpose, we formulate a theoretical model and the related regression system. The models allow us to understand and quantify the supply-side (SS) and demand-side (DS) effects of GEs in determining prosperity or stagnation across countries. This study provides cross-country evidences and related mechanisms supporting the hypothesis and conclusion that active short-term AD policies and over-estimated potential output, as argued in Orphanides (2003), were contributive to the Great Inflation.


2017 ◽  
Vol 6 (2) ◽  
pp. 101-124
Author(s):  
Marijana Mitrović-Mijatović ◽  
Maja Ivanović

Abstract This paper analyses inflation in Montenegro, a country which uses euro outside the euro area, and investigates the factors which contribute to price differentials in Montenegro relative to the euro area. Furthermore, the paper examines whether changes in the real effective exchange rates, which in Montenegro’s case follow the path of price differentials, may have any influence on country’s competitiveness.


2016 ◽  
Vol 11 (1) ◽  
pp. 7-17 ◽  
Author(s):  
Hasan Engin Duran

Abstract The aim of the present article is to analyze the convergence of regional inflation rates in Turkey from 2004 to 2015 by adopting sigma convergence and distribution dynamics approaches. The outcomes of our research can be summarized in two groups. First, inflation disparities tend to decline over time, especially during the post-crisis period after 2010. Hence, the aggregate price stabilization and disinflation process in Turkey is coupled with convergence in inflation rates across regions. Second, in addition to the findings in the literature, we find that regions change their relative inflation rate positions quite often. This indicates that regional inflation behavior is random and non-structural, as the relatively high and low inflationary places tend to change their quintiles frequently. The results imply several policy suggestions. First, achieving inflation convergence is a harder task than initially understood, as it seems to show random behavior. Second, trade integration can be an option to foster regional price convergence.


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