The third issue of the Russian Journal of Money and Finance: What new central banks learn about inflation

Today, central banks understand the nature of inflation and its mechanisms much better than 20-30 years ago. However, there are still quite a few blank spots in this topic.

The third issue of the Russian Journal of Money and Finance is mainly dedicated to inflation and inflation targeting. A review by Andrey Sinyakov and Ivan Khotulev (Bank of Russia) reveals the main results of the studies presented at the conference Inflation: New Insights for Central Banks held by the Bank of Russia in June 2018. Two papers presented at the conference are published in the journal in full: experts from the Swiss National Bank and the Bank for International Settlements suggest derived measures to estimate long-term inflation expectations for countries without inflation swap markets, and experts from the Central Bank of Hungary analyse the impact of external and domestic drivers of the Hungarian inflation.

The topic is completed by a paper by Philipp Kartaev and Irina Luneva from the Lomonosov Moscow State University. They compare the efficiency of two inflation targeting regime – pure and mixed (hybrid). Pure inflation targeting is a regime under which inflation is the only variable in a central bank’s objective function, while hybrid targeting, in addition to inflation, includes the exchange rate in monetary authorities’ objective function.  Modelling conducted on panel data of 32 countries evidence that countries using the hybrid regime show a higher probability of achieving the inflation target.  A possible explanation of this rather paradoxical result is that a higher exchange rate volatility should trigger a rise in inflation expectations, and smoothing exchange rate fluctuations enhances the probability of meeting the inflation target.

Luis Araujo and Andrei Shevchenko from the Michigan State University unveil the existence of a trade-off between efficiency and information transmission comparing two trading protocols in markets with informational and search frictions: price posting and bargaining.  In relatively stable markets (e.g., retail markets), price posting emerges as a prevailing trade mechanism and appears efficient.   But if a market is characterised by a constant state of flux and uncertainty (e.g., the Federal Funds market), then buyers and sellers do better by participating in a series of bargaining sessions constantly updating their beliefs about the state of the market.

The final paper of this issue by the economists from the Centre for Macroeconomic Analysis and Short-Term Forecasting attempts to estimate financial sector development targets which provide for the best possible GDP performance while ensuring its growth sustainability along with price and financial stability. The study uses data from 63 emerging and advanced economies covering 1980-2014.

26 September 2018

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