Inflation Targeting As a Tool for Maintaining Price Stability of The National Bank of Ukraine
Abstract
Introduction. Inflation targeting is a tool for ensuring price stability in the economy and therefore requires harmonious coordination and communication among government institutions. At the same time, the central bank must adhere to a certain policy instrument, the established legal rules, which are fixed in its mandate, or act at its discretion. Nowadays, the most common rule of monetary policy is inflation targeting.
Aim and tasks. The purpose of the article is to explain the expediency of using the inflation targeting regime to keep inflation at a certain target level, which is determined by the central bank taking into account the current state of the economy.
Results. The theoretical model of Taylor is considered, which is based on inflation assessment in the form of a simple interest rate rule based on monetary policy instruments that ensure convergence of the inflation forecast to the target value in the medium term. The obtained results reflect the volatility of the indicators of the objective function in the data range of 2015 Q3–2021 Q2 and confirm the weight of the gap of variable values that are estimated to be insignificant (95%). Using the GMM method, the relationship between the indicators of the objective function and their impact on the inflation rate through the use of the inflation targeting regime was verified. In particular, the volatility of variables such as the inflation gap, short-term interest rate, output gap, and exchange rate gap and their impact on the target inflation rate was revealed on the time horizon of monetary policy. Smoothing out gaps in variables is one of the goals of the central bank's reaction function under the inflation targeting regime. The use of the GMM method confirms the validity of the application of Taylor's rule regarding the feasibility of choosing an objective function with predetermined variable parameters at different sampling intervals.
Conclusions. The increase in the volatility of variable parameters in the objective function of central banks under the inflation targeting regime is explained by global crises and the sensitivity of macroeconomic indicators to fluctuations in the economic situation. This is the main reason why central banks strictly follow the rules of monetary policy, which allow the timely smoothing of exogenous shocks in the economy.
Keywords:
Taylor rule, gap output, central bank, inflation, targeting.References
Barro, R. J., & Gordon, D. B. (1983b). Rules, discretion and reputation in a model of monetary policy. Journal of monetary economics, 12 (1), 101–121. https://doi.org/10.1016/0304-3932(83)90051-X
Baxa, J., Horváth, R., & Vašíček, B. (2013). Time-varying monetary-policy rules and financial stress: Does financial instability matter for monetary policy? Journal of Financial Stability, 9(1), 117-138. https://doi.org/10.1016/j.jfs.2011.10.002
Baxa, J., Horváth, R., & Vašíček, B. (2014a). How does monetary policy change? Evidence on inflation targeting countries. Macroeconomic Dynamics, 18 (3), 593–630. https://doi.org/10.1017/S1365100512000545
Benati, L. (2008). Investigating inflation persistence across monetary regimes. The Quarterly Journal of Economics, 123 (3), 1005–1060. https://doi.org/10.1162/qjec.2008.123.3.1005
Clarida, R., Galí, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: evidence and some theory. The Quarterly journal of economics, 115 (1), 147–180. https://doi.org/10.1162/003355300554692
Cogley, T., & Sargent, T. J. (2001). Evolving post-world war II us inflation dynamics. NBER macroeconomics annual, 16, 331–373. https://doi.org/10.1086/654451
Conrad, C., & Eife, T. A. (2012). Explaining Inflation-Gap Persistence by a Time-Varying Taylor Rule. Journal of Macroeconomics, Forthcoming, University of Heidelberg, Department of Economics, Discussion Paper No. 521. http://dx.doi.org/10.2139/ssrn.1703350
Feldkircher, M., Huber, F., Moder, I. (2016). Modeling the evolution of monetary policy rules in cesee. Focus on European Economic Integration, 1, 8–27.
Friedman, M., & Schwartz, A. J. A. (1963). Monetary history of the United States, 1867-1960. Princeton, N.J.: Princeton Univ. Press (for Nat. Bur. Econ. Res.).
Frömmel, M., & Schobert, F. (2006). Monetary policy rules in central and Eastern Europe (Tech. Rep.). Diskussionsbeitrag.
Garbowski, M., Mironova, D., Perevozova, I., Khrushch, N., & Gudz, I. (2019). Influence of IPO on macroeconomic security of countries. Journal of Security and Sustainability Issues, 8(4), 841-853. http://doi.org/10.9770/jssi.2019.8.4(24)
Hansen, L. P. (1982). Large sample properties of generalized method of moments estimators. Econometrica: Journal of the econometric society, 50(4), 1029–1054. https://doi.org/10.2307/1912775
Hodrick R. J., & Prescott E. C. (1997). Postwar US business cycles: an empirical investigation. Journal of Money, Credit and Banking, 29(1), 1-16. https://www0.gsb.columbia.edu/faculty/rhodrick/prescott-hodrick1997.pdf.
Judd, J. P., & Rudebusch, G. D. (1998). Taylor’s rule and the fed: 1970-1997. Economic Review. Federal Reserve Bank of San Francisco, 3–16.
Kalman, R. E. (1960). A new approach to linear filtering and prediction problems. Journal of Basic Engineering, 81(1), 35–40.
Kydland, F. E., & Prescott, E. C. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of political economy, 85 (3), 473–491.
Kyrylenko, V., Kulaga, I., Tkachenko, O., & Khokhych, D. (2021). Independence of central bank: new challenges. Financial and credit activities: problems of theory and practice, 4(39), 4–11. https://doi.org/10.18371/fcaptp.v4i39.238455.
Mandler, M. (2007). The Taylor rule and interest rate uncertainty in the US 1955-2006. Giessen: University of Giessen.
Martin, C., & Milas, C. (2013). Financial crises and monetary policy: Evidence from the UK. Journal of Financial Stability, 9(4), 654–661. https://doi.org/10.1016/j.jfs.2012.08.002
Newey, W. K., & West, K. D. (1987). Hypothesis testing with efficient method of moments estimation. International Economic Review, 28(3), 777–787.
Orphanides, A. (2004). Monetary policy rules, macroeconomic stability, and inflation: A view from the trenches. Journal of Money, Credit and Banking, 36(2), 151–175.
Plantier, C., & Scrimgeour, D. (2002). Estimating a Taylor rule for New Zealand with a time-varying neutral real rate. Reserve Bank of New Zealand Discussion Paper Series DP2002/06, Reserve Bank of New Zealand.
Podpiera, J. (2008). The role of ad hoc factors in policy rate settings. Economic Modeling, 25 (5), 1003–1010. https://doi.org/10.1016/j.econmod.2008.01.005
Sakun, A., Perevozova, I., Kartashova, O., Prystеmskyi, O., & Mokhnenko, A. (2021). Innovative Paradigm of Management Accounting and Development of Controlling in the Entrepreneurship. Universal Journal of Accounting and Finance, 9(4), 548-564. https://doi.org/10.13189/ujaf.2021.090403
Taylor, J. B. (1993). Discretion versus policy rules in practice. In Carnegie Rochester conference series on public policy, 39, 195–214.
Zayed, N. M., Mohamed, I. S., Islam, K. M. A., Perevozova, I., Nitsenko, V., & Morozova, O. (2022). Factors influencing the financial situation and management of small and medium enterprises. Journal of Risk and Financial Management, 15(12), 554. https://doi.org/10.3390/jrfm15120554
Zhang, C., Osborn, D. R., & Kim, D. H. (2008). The new keynesian phillips curve: from sticky inflation to sticky prices. Journal of Money, Credit and Banking, 40(4), 667–699. https://doi.org/10.1111/j.1538-4616.2008.00131.x
If the article is accepted for publication in the journal «Economics. Ecology. Socium» the author must sign an agreementon transfer of copyright. The agreement is sent to the postal (original) or e-mail address (scanned copy) of the journal editions.
