Download Cwshtje nw lidhje me kalimin nw shwnjestrimin e inflacionit

Adopting inflation targeting in
Albania
Bank of Albania
July, 2004
Overview
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What is inflation targeting?
Problems of alternative regimes
Preconditions
Problems
Decision Making
Technical issues
Inflation targeting
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Inflation targeting was initially adopted
by New Zealand in 1990, followed by
many industrialised countries, and lately
by developing countries.
Until now, none of the countries that
adopted the IT regime has not given it
up.
What is inflation targeting
regime?
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Making public a numerical, mid-term inflation target
Institutional commitment to price stability as the main objective of
monetary policy, and all the other objectives depending on it
An overwhelming information strategy, where many variables, not
only monetary aggregates or exchange rate, are taken in
consideration in order to decide on changing monetary policy
instruments
High transparency of the monetary policy strategy by
communicating to the public and the market plans, objectives and
decisions of monetary authorities
Increasing the central bank’s accountability in meeting inflation
targets.
Problems of alternative
regimes
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Targeting monetary aggregates
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Requires a high correlation that can be forecasted
between the selected aggregate and prices
Money demand has reflected a high volatility and
frequent structural changes
A very unstable relation between money supply
and monetary policy objective (inflation level)
Not easily understood by the public
Problems of alternative
regimes
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Fixing the exchange rate:
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The central bank looses the independent control on
monetary policy
Fewer possibilities to respond to internal and
external shocks
Stimulators of “dollarisation” of liabilities are
generated
Potentially dangerous because it can emerge
from financial and banking system crises, with
negative impacts on production
Advantages of inflation
targeting
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An effective regime in reducing volatility in economy
and ensure price stability by increasing credibility and
accountability
Makes decision-makers focus on long-term solutions
Allows monetary policy to focus on internal problems
and demand shocks
Easily understood by the public, enhancing thus
responsibility and transparency
An effective mode to manage and reduce inflation
Preconditions
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When is adopted inflation targeting?
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Moving from a fix to a flexible exchange
rate
Concerns on inflation expectations
Need to peg expectations and guide
monetary policy decisions
Preconditions
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Independence of the central bank?
- De facto or de jure?
- In objectives or instruments?
- The latest trends in the world (independence and
objectives)
Lack of fiscal domination
- The central bank is not conditioned by the need to finance
the government’s budget
- Debt and risks of non-continuance of policy in the
future:Would the central bank hesitate to tighten monetary
policy for fiscal reasons, although it would be forced to do
such a thing to keep inflation?
Implications of the financial sector conditions
Preconditions
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Effective instrument monetary policy
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Relatively stable relation with inflation
Use of indirect instruments of monetary
control
Usually, a short-term interest rate
Preconditions
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Transparency and accountability
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Need to have the public understanding
inflation targeting
Publication of Inflation report
Publication of Monetary Policy Committee
minutes (Supervisory Council minutes)
Presentation of the central banks’
governing unit members before
parliamentary committees
Inflation report
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Inflation reports are an important element in
insuring transparency and accountability.They
should include:
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An analysis of the current situation
A forecast of the inflation rate (including
insecurity), forecasts and suppositions on
macroeconomic variables, and also an explanation
on the way they are combined
An explanation of the monetary policy conducted
IT pitfalls
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Flexibility versus credibility
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The more flexible the framework, the less credible
Too much rigidity might lead to unnecessarily to a
big difference in output
Coexistence of multiple pegs is very probable to
become a source of conflicts in policies, wchi can
harm credibility
Win credibility first in order to increase chances of
having greater flexibility later
Decision-making
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Inflation targeting involves judgment
Economic models can be only an input
in decision-making, especially for
developing countries
Survey of relevant data in building up
an opinion on inflation
Technical issues
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Setting a credible inflation targeting
- An appropriate price index as an indication
of inflation targeting
- The hub for policy purposes (core index
versus the already available indexes)
- Inflation target: point, band, mid-term
average?
- Deadline of meeting the target
Inflation level
Greenspan definition:
 An inflation rate so low that consumers
and businesses do not take in
consideration in their daily decisions
 Any inflation level between 0 and 3 per
cent meets this criteria
Technical issues
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Understanding the transmission mechanism
of monetary policy
Role of short-term interest rates (intraday
facilities) in interbank market – a policy
instrument
Role of assets price, expectations, credit or
monetary aggregates, salaries and incomes
Main shocks that have characteristically
affected the aggregate demand and inflation