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Introduction
to Part I
IMF Managing Director
Horst Köhler (Chapter
1) lays out the relevance
of inflation targeting
for the IMF's responsibilities
to conduct surveillance
on global macroeconomic
and financial stability
and to provide policy
advice to member countries.
Many countries have moved
recently toward flexible
exchange rate regimes.
Under such regimes inflation
targeting provides an
anchor for inflation expectations,
and the profile and importance
of the statistical underpinnings
are enhanced. The authors
of the remaining chapters
in this section concur
that information requirements
follow directly from the
policy requirements of
inflation-targeting regimes:
a formal commitment to a specific rate
of inflation, a designated
measure of inflation (for
example, the consumer
price index), analytical
tools to forecast inflation,
analytical tools to analyze
the monetary transmission
mechanism and the central
bank's ability to influence
inflation, and a communication
policy.
Another common theme
is that inflation targeting
imposes a high degree
of discipline on central
banks and national statistical
offices. Commitment to
a target that can be readily
observed by the public--for
example, the headline
inflation figure--makes
the central bank's performance
much more transparent;
any failures to achieve
the target will be obvious.
A number of statistical
implications can be observed.
Ongoing communication
with the public, including
through regularly published
inflation reports and
analysis, becomes a vehicle
for establishing credibility
and handling any deviations
from the target. To some
extent, inflation targeting
changes the data requirements
for setting monetary policy:
there is, for example,
more emphasis on forward-looking
indicators, including
property occupancy rates,
labor market information
(wage and compensation
indices), interest rate
yield curves, and long-term
bond rates. The extent
to which these data are
available varies greatly
across countries. Countries
that have more developed
financial markets tend
to have a richer set of
forward-looking data to
rely on, and may therefore
have the greatest opportunities
in pursuing an inflation-targeting
regime.
Malcolm Knight, Robert
Fay, and Brian
O'Reilly (Chapter 2) reflecting
on the Canadian experience,
stress the long time lags
involved in monetary policy
and the great amount of
information and study
necessary for effective
policy. Policy actions
are taken with a view
toward influencing the
price level 18 to 24 months
down the road, and effectiveness
is closely related to
credibility. The uncertainly
inherent in statistical
models, and hence the
need to "diversify" in
research and models, leads
central banks to process
vast amounts of information.
The authors provide an
overview of the basic
statistical elements and
the framework for evaluating
statistical information
as developed by the Bank
of Canada.
Pali J. Lehohla and
Annette Myburgh (Chapter
3) discuss differences
in user needs with respect
to price indicators, which
led Statistics South Africa
to produce, in addition
to the overall consumer
price index, two core
price indices and other
variants including different
regional coverage.
Amando M. Tetangco,
Jr. and Ma. Cyd
N. Tuano-Amador (Chapter
4) note that inflation
targeting leads central
banks to place more emphasis
on the medium-term perspective
and less on day-to-day
developments. Data needs,
accordingly, are more
focused on forward-looking
indicators. In the Philippines
and elsewhere, the central
bank produces quarterly
inflation reports, which
help focus research with
respect to the reaction
function and the transmission
mechanism of monetary
policy. In the case of
deviations from the target,
the governor must write
an open letter explaining
the deviation and how
the central bank intends
to return to the target
path. These information
requirements are vehicles
for better transparency.
Svante Öberg
and Hans Lindblom
(Chapter 5) describe
the experience in Sweden,
where the central bank
commissions from Statistics
Sweden the publication
of two monthly measures
of "underlying inflation"
which exclude "temporary"
effects that enter into
the CPI as well as the
development of additional,
forward-looking indicators.
Glenn Stevens (Chapter
6) notes that, while
more frequent data are
generally believed to
be better, some countries
with quarterly data, like
Australia, have successful
inflation-targeting regimes.
More important are the
availability of credible
CPI series and the analytical
capacity to "dissect"
and interpret these data,
especially to separate
temporary from permanent
price changes. Independence
of the data-producing
agencies is key to credibility,
as is the central bank's
ability to present a comprehensive
macroeconomic analysis
to the public that includes
but is not limited to
price developments.
Another theme echoed in
many of the chapters is
that inflation targeting
has meant that central banks
or national statistical
agencies must develop their
ability to research inflation,
dissecting data to distinguish
between "one-off," or transitory,
factors affecting inflation
and more permanent changes,
and removing volatile items
or those independent of
central bank action in order
to determine appropriate
policy responses. |
