Sunday, February 10, 2008

Inflation Targeting Lite

A Note On Inflationary Expectations Dynamics In Ghana;
The Bank of Ghana’s policy option to explicitly target inflation in Ghana has received positive and exciting results even though there is this perception that monetary operations in an economy such as Ghana is quite complicated given the relatively shallow financial markets coupled with a history of endemic inflation and inflationary expectations which had been factored into all aspects of economic activity in Ghana. Unlike many African countries, the Bank of Ghana with the new Banking Act (2004) and the new Bank of Ghana Act 612 (2002) has an explicit primary objective of price stability and a secondary objective of promoting growth but which has been subordinated to the primary objective. This unlike other African economies creates the necessary platform for the Bank of Ghana to explicitly target inflation as its main policy objective.

Drawing inferences from the work by Porter and Yao (2005) on Mauritius and given that Ghana’s monetary policy even though explicitly targets inflation but at the same time is active on the foreign exchange market (managed floating system) to correct distortions, our form of inflation targeting could be labeled as "inflation targeting lite" (Stone, 2003, p8). This form of characterization is defined as one where the central bank "announce[s]" a broad inflation objective, most likely an annual target but in most cases due to the vulnerability of the economy to shocks and weak institutional framework, this broad objective is not used as a method of assessment of monetary authorities.

'Inflation Targeting Lite' in Small Open Economies: The Case of Mauritius;
Summary: This paper develops a new macrofinance model for small open economies, allowing the investigation of Mauritius's experience with 'inflation targeting lite' as described in Stone (2003). It finds that this monetary policy regime has been associated with a general reduction in inflation, principally through a reduction in inflation expectations. The credibility the Bank of Mauritius has established with its 'inflation targeting lite' regime has allowed it to shift from an emphasis on exchange rate targeting towards inflation targeting. By estimating a model in which the yield curve is modeled explicitly we are able to obtain estimates of inflation expectations.

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