Timing and duration of inflation targeting regimes

Abstract

Central banks in G7 countries shifted to unconventional policy measures in the aftermath of the Financial Crisis, when faced with economic slack, financial instability and fiscal trouble. This shift ended a spell of rules-based time consistent monetary policy that started in the mid-1980s. I argue that substantial economic, political and financial risks put pressures on the continued support for a monetary regime. Central banks may be forced to adopt policies with no option to reset those options later on. I demonstrate with duration models-on a sample of industrialized and emerging economies from 1970 to 2012-that the policy switch to inflation targeting happened after episodes with high inflation and public debt, reflecting broad support for stability-oriented monetary (and fiscal) policy. More generally, changes in monetary regimes occur after a crisis. High inflation makes central banks pursue active monetary policies, while they forsake those same policies in the wake of fiscal or financial crises.

Testing the Market Efficiency When Interest Rates Change: Case in Indonesia

“…Conceptually, the policy of changing interest rates from the central bank is a follow-up action to reduce the inflation rate in maintaining economic stability (Thanh, 2015). According to Claeys (2015) and Tadle (2022), the policy of reducing interest rates is taken when the inflation rate is relatively in normal conditions and vice versa if the inflation rate is relatively high then interest rates will increase.…”