تنوع تورم بین ترجیحات بانک مرکزی و ساختار اقتصاد : یک یادداشت

The current paper seeks to build a theoretical explanation to understand why many central banks failed to reduce inflation variability despite having the desire. The result proves that central bank's preferences are a necessary condition but not sufficient to guarantee lower inflation variability. The structure of the economy and the types of the shocks are significant factors.

Monetary policy regimes in many countries around the world have changed noticeably over the decade of 1990s. Many central banks moved from monetary targeting to inflation targeting. Cecchetti and Ehrmann (2000) mention that in 1990 only 4 central banks either had an explicit monitoring range or an actual target for inflation. By 1998, this number had risen to 40 central banks. Consequently, central banks, particularly in developed countries, have become more independent, more accountable and more transparent. Despite that these changes are real the results are still confusing and astonishing. The main argument against inflation targeting policy is that the inflation rate in inflation-targeting countries is not lower than the inflation rate in countries that adopted other monetary regimes. Moreover, there is a conflict regarding the cost of inflation targeting policy on economic growth. Arestis and Angeriz (2007) have a comprehensive literature review of inflation targeting. The international empirical evidence from the literature produces mixed results. Taylor, 1980 and Taylor, 1994 shows that the short-run trade-off between the level of inflation rate and output-gap implies a long-run trade-off between their respective variances. Cecchetti and Ehrmann (2000) present an evidence of improvement in economic performance. They examine the direction of real output growth and inflation rate in a sample of 23 developed and developing countries before and after 1990s. They find that inflation rate declines and output growth increases in all countries of their sample. Moreover, they discover that volatility in both output and inflation fell in all countries. They justified this conclusion by suggesting that this period has positive aggregate supply shocks which move output and inflation in opposite directions and force monetary policymakers to make their policy action choices. Further, Cecchetti and Ehrmann (2000) examine the outcomes for 5 years before and 5 years after inflation targeting was implemented by a sub-sample consisting of 9 countries. They aim to evaluate the performance of the new policy, if a country is initially operating on a fixed output-inflation variability frontier, then the shift to inflation targeting would be expected to move the point on the curve where the economy has higher output variability and lower inflation variability. They find just only one country, New Zealand, which succeeds to reduce inflation variability and has more output variability. This means that the relationship between output variability and inflation variability in 8 countries is positive. Arestis and Mouratidis (2003) explore the credibility of monetary policy in five member countries of the European Monetary System over the period (1979–1998). The results confirm that monetary policy was more sensitive to inflation variability than to output-gap variability. These countries put a lot of emphasis on the price stability objective. Arestis and Mouratidis (2004) state the previous empirical studies focus on the long-run variability trade-off. They suggest studying the short-run variability because it yields useful information on the long-run relationship between output-gap variability and inflation variability. For this purpose they focus on an empirical model of the conditional volatilities. Their empirical analysis has been carried out for eleven European monetary union countries. They use quarterly data for the period (1979–1998) and they split it into two groups. The first group starts from the first quarter of 1979 with the commencement of the European Monetary System, through to the last quarter of 1991, when the Maastricht Treaty was launched. The second group starts from the first quarter of 1992 and terminates in the fourth quarter of 1998, just before the introduction of the European monetary union and the euro. Their results prove that most the countries have an improvement in the output-inflation trade-off which means output and inflation variabilities decline. On the contrary, Netherlands and Greece have an increase in output and inflation variabilities. The results of Arestis and Mouratidis (2004) are consistent with the Cecchetti and Ehrmann (2000) results in terms of none of those eleven countries operates on a fixed output-inflation variability frontier. Thus, none of them moved to a situation where the economy has higher output variability and lower inflation variability. Taylor, 1980, Taylor, 1992, Taylor, 1994, Fuhrer and Moore, 1995 and Fuhrer, 1997 show that any attempt in the USA economy to stabilize inflation leads to higher output-gap variability. Taylor, 1992 and Fuhrer, 1997 presents a comparison of different output-inflation variability frontiers calculated by many economists using different methodologies over different time horizons. This comparison proves that USA economy operates on a fixed output-inflation variability frontier, but, each estimated output-inflation variability curve has different shapes and slopes. The results of Lee (1999, 2002) regarding the USA output-inflation variability frontiers support the findings of Taylor, 1980, Taylor, 1992, Taylor, 1994, Fuhrer and Moore, 1995 and Fuhrer, 1997. Additionally, in Lee (1999) the slope of the frontier is considerably flat, however, in Lee, 2002 and Lee, 2004 it becomes steeper. Moreover, in Lee (1999) variability trade-off is more apparent for the post-October 1979 sub-period. In contrast to his previous finding of the USA economy, Lee (2004) empirical analysis supports the idea that output-inflation variability is equivocal in a sample of 22 OECD members over the (1984–2001). He utilizes both short-run and long-run volatility dynamics. The abovementioned international empirical evidence from the literature illustrates that the output-inflation variability frontier is not a down-ward sloping curve in all countries and not static in all time horizons. Moreover, it has different shapes and slopes. The current paper intends to examine a theoretical explanation from the literature to understand why in some cases the economy does not have a unique relationship between output variability and inflation variability. Specifically, this paper seeks to answer the following question why the relationship between inflation variability and output variability sometimes is negative and in others it is positive. The other side of the issue is that central banks of many countries failed to achieve their inflation targets despite having the preferences. The evidence from the literature provides scholars with significant information. Roger and Stone (2005) find that the central banks of a group consists of 22 countries from both industrial and emerging market countries missed their inflation targets in a range of 30% to 60%. These countries have both stable inflation and disinflation rates. Albagli and Schmidt-Hebbel (2004) find several measures such as institutional and policy weaknesses; lack of central bank independence and high country risk-premium contribute notably to inflation target misses. Gosselin (2007) extends the work of Albagli and Schmidt-Hebbel (2004) in order to understand factors affecting inflation rate targets deviations and to identify the empirical determinants of successful monetary policy under inflation targeting. He finds that exchange rate movements, fiscal deficits and differences in financial sector development can explain deviation of inflation rates from their targets. In addition, he finds that higher inflation target and wider inflation control range are associated with more fluctuation in inflation rate and output. Ize (2006) does an empirical study concerning spending seigniorage and use data from 101 countries. He finds that the trend of world inflation rate is declining during the period (1986–2003) from 16% to 5%. As a result, the central bank's ability to create seigniorage or revenues deteriorates. This opens an imperative question regarding the seriousness of some central banks that achieve losses to reduce inflation rate. Svensson (2006) says that central bankers are not only targeting the inflation rate but also other variables in the economy. This diversification in the objectives might give a stretch to the target. Ball and Sheridan (2005) find no evidence that inflation targeting makes a difference in industrial countries. This means that inflation targeting does not improve economic performance. They justify their results based on the concept of “regression to the mean”, which means a country which starts with a high inflation rate tends to find the decline in the inflation rate faster than a country starts with a low inflation rate. Sweidan (2008) proves theoretically that both central bank's ability and preference in developing countries are essential to elucidate the inflation biased and the movement of monetary policy instrument. The contribution of the current paper is to utilize a model from the existing literature to highlight on the relationship between inflation variability and output variability. We aim to explain the behavior of inflation variability and output variability based on international empirical evidence. The rest of the paper is organized as follows: Section 2 presents the model of the paper. Section 3 has the conclusion of the current note.

During the last two decades central banks of developed and developing countries alike moved to target a certain level of inflation rate. The international evidence of such a policy shows that very few countries succeed to reduce inflation variability. At the same time, the international empirical evidence proves that the relationship between output variability and inflation variability is changing its sign. Thus, there is no unique relationship between them. The current paper seeks to examine a theoretical explanation from the existing literature to understand why central banks from many countries failed to reduce inflation variability, eventhough they have the preference because the prime goal of central banks is to achieve price stability. We employ two central bank preferences; quadratic and asymmetric loss functions. In addition, we have the same economy structure in both cases. The analysis shows that in the quadratic loss function the central bank's preference is able to create a clearer trade-off. The policy reaction to a negative aggregate supply shock relies on the central bank's preference and the structure of the economy. However, in the asymmetric loss function, the policy reaction counts on the structure of the economy only. Altering the structure of the economy is responsible for changing the slope of the trade-off frontier. Thus, it makes the economy jump from one point to another on a new trade-off curve which causes a non-unique relationship between output variability and inflation variability. The policy implication of the note's outcome is that the policy reaction in the case of quadratic loss function has two options which are to push the aggregate demand to the right and to the left. However, in the asymmetric loss function, policy reaction has only one choice movement which is either to the right or to the left. The asymmetric loss function expands the analysis by adding-up inflation uncertainty. The analysis illustrates that the policy response to such uncertainty shock relies on the slope of the aggregate supply curve and the central bank preferences. The uncertainty shock is caused by policy reaction. Therefore, the current note proves that policy reaction itself causes additional output and inflation variabilities. Further, central bank's preferences are a necessary condition but not sufficient to guarantee lower inflation variability. The slope of the aggregate supply and the type of the shock are significant factors that determine inflation variability in the economy.