John D. Burger, Francis Warnock, Veronica Cacdac Warnock, 19 September 2018

A large share of Turkey’s bonds are denominated in foreign currencies, and the Turkish lira has depreciated. This recalls the currency mismatches that contributed to many crises in the 1990s. The column argues that many emerging economies like Turkey's are better able to avoid these crises thanks to improved policies, such as inflation targeting, that have helped foster local currency bond markets. Emerging markets policymakers must not backslide on this progress if they want to maintain financial stability.

Davide Debortoli, Jinill Kim, Jesper Lindé, Ricardo Nunes, 17 September 2018

Previous studies have suggested that for central banks, a focus on inflation stabilisation is enough to stabilise other macroeconomic variables, and that focusing on economic activity can even be harmful. Using a model similar to those in use at central banks, this column studies the welfare implications of increasing the weight on economic activity in the central bank’s objective. The results suggest that stabilising measures of economic activity should be one of the primary objectives of central banks, as important as or even more important than stabilising inflation around its target. 

Alfonso Rosolia, 14 September 2018

Given the role firms play in the transmission of monetary policy decisions, it is useful to understand how they form their inflation expectations. The column uses data from Italy to show that firms are attentive to the economic environment, even if they are not completely aware of the latest developments. They are also able to extract relevant information to update their expectations from ECB communications.

Marcel Fratzscher, Christoph Grosse Steffen, Malte Rieth, 17 August 2018

Does inflation targeting help absorb large shocks? This column shows that it implies higher output growth and lower inflation when countries are hit by natural disasters. Hard targeting works in these cases; soft targeting does not. This has impacts for how we evaluate the success of inflation targeting during the global crisis, but also for the debate on flexible inflation targeting.

Antoine Levy, 22 July 2018

The euro improved the credibility of monetary policy for many member states, but the downsides of not having monetary autonomy became painfully apparent during the European debt crisis. This column proposes ‘targeted inflation targeting’ as a way to improve stabilisation mechanisms in the euro area, without losing the benefits of integration. The ECB would maintain a rules-based approach that targets countries in a weaker macroeconomic position more aggressively.

Roberto Duncan, Enrique Martínez García, 08 June 2018

Understanding what helps forecast inflation is important for any modern economy, but analysis remains limited in the emerging market economy context. This column presents recent findings on inflation forecasting in such economies, showing that a variant of the simple random walk model specification seems difficult to beat. The strong forecasting performance of this model can be observed even though many emerging economies have adopted a de facto or de jure inflation-targeting regime.

Juan Dolado, Gergo Motyovszki, Evi Pappa, 17 May 2018

There is ongoing debate over the welfare implications of the unorthodox measures adopted by central banks in the wake of the Global Crisis. Using US data, this column explores the implications of monetary policy for income and wealth inequality. Unexpected monetary expansions are found to increase inequality between high- and low-skilled workers. In terms of stabilising the economy, strict inflation targeting is found to be the most successful policy.

Seppo Honkapohja, Kaushik Mitra, 09 April 2018

The Global Crisis and Great Recession dealt a blow to inflation targeting as a good monetary policy framework, and several prominent economists and central bankers have suggested that price-level targeting could help in bringing the economy back to normal. This column argues that although a newly established policy regime could well have low initial credibility, this may not be a problem as credibility can improve over time and lead to convergence toward the target equilibrium.     

Kevin Daly, Loughlan O'Doherty, 05 March 2018

Recent years have seen emerging market economy inflation rates converge towards developed economy rates, as well as convergence between emerging markets. The sustained improved inflation performance in emerging markets has occurred even as unemployment in many of these economies has fallen to record lows. This column attributes the improved performance to two factors: increases in monetary policy credibility following the widespread introduction of inflation targeting, and a reduction in the frequency of emerging market currency crises, reflecting a secular improvement in their balance sheets.

Andrew Powell, 25 November 2017

The recent interest rate rise in the UK occurred despite negative economic news. This is not what conventional inflation-targeting policy would imply. This column argues that recent Latin American experience suggests the theory underlying inflation targeting may need to be reconsidered. Specifically, for small open economies, the role of the exchange rate and inflation expectations should be considered when deciding how to react. 

Mojmir Hampl, Tomas Havranek, 12 September 2017

Seven out of every ten Europeans live in their own homes, yet Europe’s most important inflation measure excludes the costs associated with owner-occupied housing. This column argues that including the costs of home ownership would prove beneficial to the conduct of monetary and macroprudential policy. It would also bring the measure closer to what most people consider inflation to be.

Yosuke Takeda, Masayuki Keida, 18 June 2017

Communication strategies have become a policy instrument used by central banks to control expectations. This column uses a natural language processing method to explore the Bank of Japan’s communication strategy from July 2012 to November 2016, a period during which both Masaaki Shirakawa and Haruhiko Kuroda held office. The analysis suggests that since 2016, when the Bank introduced a negative interest rate policy, Kuroda's communication strategy has changed implicitly.

Fredrik Andersson, Lars Jonung, 08 May 2017

Inflation-targeting central banks commonly fail to hit their official inflation targets, so targets are combined with a tolerance band which is either implicit or explicit. Taking the Swedish Riksbank as an example, this column argues that adopting an explicit tolerance band would better communicate to the public the central bank’s lack of full control over the rate of inflation and thus foster public confidence in monetary policy, and it would also increase the central bank’s ability to stabilise the economy. The width of the band can be derived from the historical inflation outcome. 

Sayuri Shirai, 16 March 2017

The Bank of Japan has been pursuing quantitative and qualitative monetary easing since 2013, but has failed to achieve its target of a stable 2% inflation rate. This column explores the Bank’s recent practices and performance, and identifies four structural factors that have contributed to the limited impact of unconventional monetary easing on aggregate demand and inflation. The Bank now needs to come up with more objective projections for the timing of achieving its price stability target. 

Hassan Afrouzi, Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, 13 October 2015

The importance of the general public’s inflation expectations is increasingly being emphasised, but surveys of firms’ expectations are notably absent. This column explores the extent to which inflation expectations of firms in New Zealand are anchored. The findings indicate that managers show little anchoring of inflation expectations, despite 25 years of inflation targeting by the central bank. Most managers depend to a large extent on their personal shopping experience to make inferences about aggregate inflation.

Michael Bordo, Pierre Siklos, 12 December 2014

Central bank credibility is critically linked to communication and commitment. This column analyses the historical evolution of credibility, showing its prewar peak and the subsequent dip from which it did not fully recover until the 1980s. Inflation targeting has played a key role in establishing credibility in both developed and emerging market economies.

Joshua Aizenman, Daniel Riera-Crichton, 28 November 2014

The growing importance of sovereign wealth funds and the diffusion of inflation targeting have impacted the adjustment of Latin American Countries to terms of trade and financial shocks. This column shows that sovereign welfare funds provide another margin of stabilisation. This role is of greater relevance for inflation targeting countries and during periods of heightened volatility. Inflation targeting regimes relegate the goal of real exchange rate stabilisation and counter-cyclical fiscal policy to its sovereign wealth fund via a fiscal rule.

Pranjul Bhandari, Jeffrey Frankel, 21 August 2014

Central banks, especially in developing countries, still seek transparent and credible communication. Yet signalling intentions through forward guidance or commitment sometimes creates undesirable constraints. This column argues that central bank pronouncements phrased in terms of nominal GDP are less likely to run afoul of the supply and trade shocks so common in developing countries, compared to pronouncements phrased in terms of inflation.

Colin Ellis, Haroon Mumtaz, Pawel Zabczyk, 06 August 2014

This column reports on empirical evidence showing that monetary policy shocks in the UK had a bigger impact on inflation, equity prices, and the exchange rate during the inflation targeting period. Related changes in the transmission of policy shocks to bond yields point to more efficient management of long run inflation expectations.

Joshua Aizenman, 03 July 2014

After a promising first decade, the Eurozone faced a severe crisis. This column looks at the Eurozone’s short history through the lens of an evolutionary approach to forming new institutions. German dominance has allowed the euro to achieve a number of design objectives, and this may continue if Germany does not shirk its responsibilities. Germany’s resilience and dominant size within the EU may explain its ‘muddling through’ approach to the Eurozone crisis. Greater mobility of labour and lower mobility of under-regulated capital may be the costly ‘second best’ adjustment until the arrival of more mature Eurozone institutions.

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