• East Asian Economic Review
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• v.22 no.4
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• pp.531-555
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• 2018

This article aims to review the monetary policy rule under inflation targeting framework focusing on Mongolia. The empirical analysis estimates the policy reaction function to see if the inflation targeting has been linked with a monetary policy rule emphasizing on inflation stabilization since its adoption in 2007. The study contributes to the literature by examining the linkage between Mongolian monetary policy rule and inflation targeting directly and thoroughly for the first time and also by taking into account a recent progress in the inflation targeting framework toward forward-looking mode. The main findings were: the Mongolian current monetary policy rule under inflation targeting is characterized as inflation-responsive rule with forward-looking manner (one quarter ahead); the inflation responsiveness is, however, weak enough to be pro-cyclical to inflation pressure; and the rule is also responsive to exchange rate due to the "fear of floating", which weakens the policy reaction to inflation and output gap.

• Korea Trade Review
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• v.47 no.5
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• pp.75-93
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• 2022

Purchasing Power Parity (hereafter, PPP) means the purchasing power of two currencies is the same when one is converted into the other one. According to previous studies on PPP, as the volatility of the real exchange rate is smaller, PPP may be more likely to hold. Since New Zealand adopted the inflation targeting policy in December 1989, many countries started to adopt it as their monetary policy frame. Previous studies on inflation targeting found that inflation targeting policy has positive effects on not only achieving price stability but also reducing the volatility of nominal/ real exchange rates. Therefore, in this study, I explored whether inflation targeting policy has positive effects on purchasing power parity subject to 19 OECD countries, applying an Exponential Smooth Transition Autoregressive (ESTAR) model during the sample periods, from 1974:Q1 to 2019:Q4. Based on the ESTAR estimate results, I found limited favorable evidence of PPP for only two countries- England and Switzerland- among 9 inflation targeters, compared to non-inflation targeters, and also I found that favorable evidence of PPP only for these two countries among 9 inflation targeters during post-inflation targeting, but not during pre-inflation targeting. These findings imply that the positive effects of inflation targeting on PPP may be questionable unlike Ding and Kim (2012) and Kim (2014)'s study.

• KDI Journal of Economic Policy
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• v.32 no.3
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• pp.1-32
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• 2010

The global financial crisis has exerted enormous impacts on the attainment of inflation target in Korea. The annual average CPI inflation was 3.3% during the targeting period of 2007-2009 and the target was $3.0{\pm}0.5%$. Thus Korea has succeeded in keeping annual average CPI inflation just below the upper limit of the 2007-2009 target under the global crisis. This paper intends to evaluate the performance of the inflation targeting system in Korea. First, it estimates the conventional call rate reaction equation under the global crisis and finds that the policy interest rates never reacted to expected inflation, output gap, and won/dollar exchange rate, as expected by theory. Second, it identifies the shock of global financial crisis into core and non-core, applying the structural VAR model. The core shock was defined to have no (medium- to) long-run impact on real output. The core shock was identified to have the character of the demand shock, since it has the positive impact on the inflation and output in the short run. The structural core inflation due to core shock was an attractor of headline inflation, not vice versa. Therefore, the structural core inflation that reflects the demand-side shock would be the better intermediate target for the final headline inflation target than the official core inflation that excludes the volatile inflation of agricultural and oil-related products. During the inflation targeting period of 2007-2009, the structural core inflation was more volatile than the official core inflation, because the global crisis has very large negative impacts on the domestic demand as well as the prices of agricultural and oil-related products. This paper shows that the negative core shock during the fourth quarter of 2008 was larger than that in the financial crisis in 1998. But the core shock turned into positive very quickly in 2009, as the Korean economy recovered very quickly from crisis. The volatile changes in structural core inflation suggests that the Bank of Korea barely managed to attain the 2007-2009 inflation target, owing to the very large negative impacts of the global financial crisis on the domestic demand. It also suggests that the rapid rise in core inflation with the rapid recovery of the Korean economy will lead to rapid rise in headline inflation.

• Asia-Pacific Journal of Business
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• v.14 no.4
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• pp.413-429
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• 2023

Purpose - The purpose of this study is to investigate the determinants of consumers' inflation expectations using consumers' inflation perceptions and the sub-components of consumer price index (CPI) basket in South Korea based on a consumer survey conducted by the Bank of Korea (BOK). Design/methodology/approach - Using Carroll's (2003) epidemiological model, we analyzed data from January 2013 to January 2023, resulting in a data set of 121 observations for both inflation perceptions and inflation expectations. This study focuses only on aggregate inflation expectations and perceptions because of data availability from the BOK. Findings - Professionals' forecasts play a major role in forming consumers' inflation expectations, whereas the actual headline CPI and consumers' inflation perceptions do not. These results remain robust when including the sub-components of the CPI basket in the analysis. Research implications or Originality - It would be the most efficient way to suppress professionals' expected inflation in fighting against a substantial spike in consumers' inflation expectations. To guide consumers' inflation expectations based on BOK's inflation targeting, the bank needs to consider professionals' forecasts in devising monetary policies.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.10
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• pp.239-247
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• 2021

Central Bank authorities should carefully manage inflation rate uncertainties to achieve economic growth and development not only in the short-run but also in the long-run. Since inflation is a key macroeconomic variable, an increased understanding about its behavior is undoubtedly important. Thus, paper employs unit root with breakpoints to examine the mean reverting behavior of inflation rate in the Philippines using monthly data from 2002 to 2020. Empirically, the unit root breakpoint innovational and additive outlier tests favor the stationarity or mean reverting behavior of inflation in the Philippines. Also, results of standard unit root tests, ADF, PP, GLS-Dickey-Fuller, KPSS and NP, provide strong evidence of mean reverting processes. The mean reverting behavior of inflation rate reveals that the monetary policy using inflation targeting framework has succeeded in reducing chronic inflation persistence in the Philippines. Thus, this research supports inflation targeting policy that aims to maintain general price level stability for the Philippine economy's long-term growth and development prospects. The findings of this research remain important for the central bankers for not only providing them better understanding about the behavior of inflation rate, but also helping them formulate and implement policy reforms related to money, credit and banking.

• The Journal of Asian Finance, Economics and Business
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• v.9 no.8
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• pp.7-17
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• 2022

The article discusses the problems caused by inflation in the developing Asia-Pacific region during the time of the worldwide pandemic and suggests innovative solutions to the problem. The reality is that some of the commodity groups from the consumer basket (e.g., non-seasonal fruits, electronics, furniture, hotel, and restaurant services, etc.) fail to reflect the needs of the low-income earners, which make the majority in developing countries. At the same time, the inflation targeting regime has become outdated and not reliable, because of uncontrolled exogenic factors (imported inflation, fluctuation in oil prices, supply chain disruption, Russia-Ukraine war, etc.) prevailing on endogenic factors and thus making it impossible to control the price stability, especially in developing countries. Since, the old-fashioned inflation index and inflation targeting mechanisms regrettably fail to fully reflect both the society and governmental/central banks' expectations, based on which we first should have better care and second create better policies; we propose to use a combination of already well-known indexes and policies, with the new statistical indicators, which reflects price fluctuations on the medication, utilities, and nutrition.

• East Asian Economic Review
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• v.22 no.2
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• pp.217-239
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• 2018

This paper tests empirically the causal relationship between bank loans and the monetary base before and after the adoption of inflation targeting in seven Asia-Pacific countries using Toda-Yamamoto Granger non causality test and the bootstrap test for causality. The most striking finding is that the bank loans Granger cause the monetary base during the inflation targeting period in all the countries, except Japan, which was under the influence of the quantitative easing, whereas the causality appeared diverse before the inflation targeting regime. This result implies the need for the policy makers to take the endogenous nature of the money supply into account in the modern economy.

• KDI Journal of Economic Policy
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• v.33 no.1
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• pp.1-44
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• 2011

Terms of trade shocks have been considered one of the main driving forces causing business cycle fluctuations in small open economies. Despite their importance in business cycles of small open economies, it is hard to find a serious study in existing literature investigating their implications on monetary policy under a small open economy. Considering it, this paper studies what form of monetary policy rule is the most adequate for a small open economy where terms of trade shocks are dominant factors in generating its business cycle fluctuations. For this purpose, various implementable monetary policy rules frequently analyzed in existing literature are compared in terms of social welfare levels which they can provide for the economy respectively. Main results of this paper can be summarized as follows. First, for a small open economy where terms of trade shocks are main driving forces of its business cycle fluctuations, the nontradable goods price inflation targeting can provide higher level of social welfare than other traditional monetary policy rules such as the CPI inflation targeting or the fixed exchange rate regime. Second, the social welfare improvement of the non-tradable goods price inflation targeting is more apparent when export goods price shocks are more important than import goods price shocks.

• East Asian Economic Review
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• v.22 no.3
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• pp.337-370
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• 2018

This paper discusses the design of monetary policy in a New Keynesian small open economy framework by introducing nominal wage rigidities and incomplete exchange rate pass-through on import prices. Three main findings are summarized. First, with the existence of an incomplete exchange rate pass-through and nominal wage rigidities, the optimal policy is to seek to minimize the output gap, the variance of domestic price and wage inflation, as well as deviations from the law of one price. Second, the CPI inflation targeting Taylor rule is welfare enhancing when there is a technological shock to the economy. The exception occurs when there is a foreign income shock, which minimizes welfare losses under the domestic inflation targeting Taylor rule. Last, two stylized Taylor rules turn out to be a bad approximation, but the modified Taylor rules that respond to the unemployment gap rather than the output gap are a closer approximation to the optimal policy.

• The Journal of Asian Finance, Economics and Business
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• v.8 no.12
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• pp.31-38
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• 2021

This study contributes to the existing literature and tries to analyze the validity of the Fisher hypothesis in the Philippines. Using monthly data from January 1995 to December 2020, the empirical analysis used the Engle-Granger and Johansen cointegration testing technique. The correlation coefficient suggests a strong positive association. All things being equal, a rise in inflation leads to a rise in the nominal interest rate. The unit-root tests show that inflation and the nominal interest rate are both stationary. Based on both Engle-Granger and cointegrating regression Durbin-Watson tests, the nominal interest rate and inflation are cointegrated. Likewise, the results from Johansen cointegration indicate that there exists a long-run relationship between the variables. However, we rejected a one-to-one relationship between nominal interest rate and inflation. The error correction term coefficient (ECM) shows that it is statistically significant suggesting that the nominal interest rate adjusts to the inflation rate with a lag. The Pair-wise Granger Causality test reported a bi-directional causal relationship between nominal interest rate and inflation. Inflation targeting has been the monetary policy framework of choice for most central banks. In essence, the conclusions of this study are useful to central banks because they help them better comprehend the long-run equilibrium relationship between the nominal interest rate and inflation.