Los medios y el poder político en India

Country Inflation- targeting adoption date Inflation rate at Adoption date (%)

Targeted inflation rate (%)

New Zealand 1990 3.30 1 – 3 Canada 1991 6.90 2 +/- 1 United Kingdom 1992 4.00 2 Australia 1993 2.00 2 – 3 Sweden 1993 1.80 2 Czech Republic 1997 6.80 3 +/- 1 Israel 1997 8.10 2 +/- 1 Poland 1998 10.60 2.5 +/- 1 Brazil 1999 3.30 4.5 +/- 1 Chile 1999 3.20 3 +/- 1 Colombia 1999 9.30 2 – 4 South Africa 2000 2.60 3 – 6 Thailand 2000 0.80 0.5 – 3 Hungary 2001 10.80 3 +/- 1 Mexico 2001 9.00 3 +/- 1 Iceland 2001 4.10 2.5 +/- 1.5 Korea 2001 2.90 3 +/- 1 Norway 2001 3.60 2.5 +/- 1 Peru 2002 –0.10 2 +/- 1 Philippines 2002 4.50 4 +/- 1 Guatemala 2005 9.20 5 +/- 1 Indonesia 2005 7.40 5 +/- 1 Romania 2005 9.30 3 +/- 1 Serbia 2006 10.80 4 – 8 Turkey 2006 7.70 5.5 +/- 2 Armenia 2006 5.20 4.5 +/- 1.5 Ghana 2007 10.50 8.5 +/- 2 Albania 2009 3.70 3 +/- 1

Source: International Monetary Fund (IMF) staff publications (Batini et al. 2006 and Johan, 2012)

Empirically, various literatures have shown that the existence inflation targeting has reduced inflation, output shocks and interest rate volatilities (Bernanke et al. 1999; Kamil, 2012; Goncalves and Salles, 2008 and Sikklos, 1999). Others argue that inflation targeting has no effect in reducing inflation, and if it does, the policy only contributes very little to lower inflation and variability (Honda, 2000; Byrne, 2012; Ye Haichun, 2007; George, 2009; Angeriz and Arestis, 2006; Johnson, 2002; Ball and Sheridan, 2003). Hence, the success of inflation targeting may be difficult to measure in both developing and developed countries because many of the developed countries that had adopted

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inflation targeting had a history of stable and low inflation before the introduction of this policy (for example, New Zealand, Canada and United Kingdom). Therefore, they did not observe recent low inflation as evidence of the success of inflation targeting because inflation also falls in many non-inflations targeting countries (for example, Japan and USA).

2.6

Central Banks and Taylor rules

A Taylor rule can be described as a monetary-policy that defines the rate at which the government should modify the nominal interest rate in response to changes in inflation, output and other macroeconomic variables. The theory gives a guide on how monetary rules should be applied to foster price stability, full employment and achieve other macroeconomic goals. Practically, the central bank will increase interest rates when inflationary pressures appear to be increased and lower interest rates when inflationary pressures are declined. Following Taylor (1993), the below equation is postulated to be used by central banks:36

𝑖_𝑡 = 𝜋_𝑡 + 𝑟_𝑡∗ + 𝑎_𝜋 (𝜋_𝑡−𝜋_𝑡∗) + 𝑎_𝑦 (𝑦_𝑡–𝑦̅_𝑡) 2.11

In this equation, 𝑖_𝑡 is the target short-term nominal interest rate (e.g. the federal funds rate), 𝜋_𝑡 is the rate of inflation, 𝜋_𝑡∗ is the inflation target, 𝑟_𝑡∗ is the assumed equilibrium real interest rate, 𝑦_𝑡is the logarithm of real GDP, and 𝑦̅_𝑡 is the logarithm of potential output as determined by the output gap. In addition, 𝑎_𝜋 and 𝑎_𝑦 are proposed to be positive (as a rule of thumb) and they were set to be 𝑎_𝜋= 𝑎_𝑦 = 0.5 (Nikolsko and Papell, 2012).

To what rate do we need to change the nominal interest rate? According to the Taylor

rule, the central bank should raise the nominal interest rate for the short-term, if inflation rises above its desired level or if the output is above potential output, i.e., 𝑎_𝑦 >

0. Thus, an increase in inflation by 1% should prompt the central bank to increase the nominal interest rate by more than one percentage point (i.e by 1 +𝑎𝑦). If inflation rises by say 1 percentage point, the central bank should increase the interest rate by 1.5

36 _{The equation is available in Taylor (1993) page 202 and expand by (Nikolsko – Rzhevskyy and}

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percentage points (Taylor 2008). He added that the interest rate does not always need to be exactly 1.5%, but it is essential to increase the interest rate by more than 1% if inflation increased by 1% to bring inflation down. If GDP starts to fall or inflation is reduced, say by one percentage point, the rule says that the interest rate should be reduced by 0.5 percentage points (Taylor 2008).

2.7 Central Bank and Exchange Rates

An exchange rate is a rate at which the currency of one country is being exchanged for that of another country or the relative price that indicates the price of one currency in terms of another currency. There are three types of exchange rate systems: (i) the gold standard - the process by which countries define its national currencies in term of the weight of gold. (II) Fixed exchange rate system- this process by exchange rate value is determined by the interaction of the government and market forces and (III) floating exchange rate - this a process by which a country’s foreign exchange rate is entirely

determined by supply and demand market forces without visible government intervention. Each exchange rate system has different advantages and implications for the conduct of the monetary policy.

2.8

The fixed exchange rate system

A fixed exchange rate, sometimes called a pegged exchange rate, is a process by which government interventions and market forces interact to determine the level of exchange rates. The procedure allows the value of the domestic currency to be fixed at the value of a selected foreign currency. The policy encourages cross-border trade investment, promotes sound macroeconomic policies, reduces uncertainty in transactions costs and controls inflation. However, a fixed exchange rate may limit the government from using other domestic monetary policy to achieve macroeconomic stability.37 _{In addition, the lack of credibility may be more destructive under fixed} exchange rates than under flexible rates because countries with fixed exchange rates are prone to currency speculation crises (Toulaboe and Terry, 2013 and Guisinger and Andrew, 2010).

37_{Under the fixed exchange rates, the domestic money stock is under the full control of monetary}

authorities, which means they may help the country to overcome external shocks, such as an unusual inflow of capital but have little influence on domestic shocks.

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2.9

The regulation of inflation under the fixed exchange rate regime

When a government experiences a balance of payments deficit, the government usually increases the tax to generate more revenue. Sometimes, governments increase interest rates to mobilise savings from the public. In this regard, an increase in tax, to generate additional revenue, may have extensive implications on economic growth; i.e.

technically, increase in government corporate tax will increase the firm’s cost of

production and decreases the consumers saving and income.38 _{In avoidance of this} impact, the government may decide to obtain a bond from the central bank. In the process, the central bank will create a bond by printing new money. The printing of the new currency will increase the domestic money supply, reduce short-term interest rates and increase the supply of domestic currency in the foreign exchange market that will likely cause a temporary balance of payments surplus. As a result, the increase in money supply in the foreign exchange market will depreciate the relative value of the domestic currency and keep inflation high if domestic growth does not increase to keep up with the increase in the money supply. To keep the rate of inflation low and prevent further depreciation of the domestic currency under this regime, the increase in the money supply by the domestic investors to the foreign exchange market will be moderated by a government. In this case, the central bank will avoid excess supply of domestic currency by operating a balance of payments deficit where the deficit will be allowed to soak up the excess money created through the printing of additional money.

Specifically, the fixed exchange rate has been used to control inflation and its impact on inflation has been compared with the impact of flexible exchange rates on inflation. For example, Corckett and Goldstein (1976) reported that flexible exchange rates generate more uncertainty than fixed exchange rates. Bleaney (1999) found that a fixed exchange rate is 10 percent less inflationary than a flexible exchange rate regime. Bleaney and Fielding, 2002; Ghosh et al. 2002; McKinnon and Schnabl, 2004 and Bleaney and Francisco, 2005 observed that exchange rate rigidity reduces inflation. Toulaboe and Terry (2013) argue that fixed exchange rates are less inflationary and the anti- inflationary benefit is heavily dependent on the monetary stability and credibility of the regime, which needs to be carefully built in a stable economy. Kiguel (2002) expressed

38_{Poulson and Kaplan (2008) explore the impact of tax policy on economic growth. The analysis} supports the hypothesis that higher marginal tax reduces the rate economic growth.

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that fixed exchange policy implemented in Argentina in the 1990s reduced the rate of inflation, improved the efficiency of privatization, reduced unemployment and increased GDP in Argentia during the period. Domac and Soledad (2000) argue that a fixed exchange regime minimizes the possibility of a banking crisis in developed countries. Calvo and Mishkin (2003) argue that strong institutions are the best mechanism to achieve macroeconomic success than any exchange rate regime. Jackson and Miles (2008) found that institutional quality and exchange rates reduce the rate of inflation.

2.10 The exchange rate policy in Oil exporting countries

Many of the OPEC countries derive their revenue from oil production; to sustain this revenue, many of these countries have obligations to minimize the cost of production. Consequently, the choice of exchange rate regime is crucial to both oil importing and oil exporting nations because the selection of the appropriate exchange rate regime could guarantee oil price stability and macroeconomic stabilities.39 _{Keeping the exchange rate} stable, the governments of many of these countries have played various significant roles in the establishment of oil reserves and controlling foreign transactions. In particular, many of the oil importing and oil exporting countries have been avoiding operating flexible exchange rates and focus on fixed exchange rates because of the vulnerability of the global oil price.40 _{For example, in 1973, Iraq and Libya pegged their currencies to} the US dollar. In 1975, the Kuwait central bank adopted an exchange rate policy pegging the Kuwait dinar to the average weight of currencies of its major suppliers (i.e., United States, Europe and Japan).41 _{Since 1975, Qatar, Saudi Arabia and the United Arab} Emirates have pegged their exchange rate to the SDR (Special Drawing Rights) to boost

39_{One country’s export is another country’s import. Increase in oil price of an exporting country will}

affect the price level of oil importing nation.

40 _{The condition is that, exchange rates are influenced by supply and demand of goods and services}

through the import and export. If the price of oil reduces in the international market, the export and the revenue of oil exporting countries may be reduced to devalue currency of the oil exporting nations against value of the currency of oil importing countries. On the other hand, if the price of oil increase in international market, the revenue of oil exporting countries will be increased to increase the value of

the currency of the oil exporting countries and decrease the value of the oil importing country’s

currency.

41 _{The process is called international currency basket - the value of Kuwait currency was used to set the}

market value of other countries. In this case, the value of the Kuwait currency was used to construct a currency basket of 40% Euro, 25% British pounds and 35% of the US dollars. The currency basket is a mutual way used to peg a currency without overexposing it to the fluctuations of a single currency.

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the confidence and stability of their local currency. Ecuador and Gabon pegged their currencies to the US Dollar and French franc, respectively (see Amuzegar, 1983). The list of BRICS and OPEC countries with fixed exchange rates and the year of adoptions are stated below: