ARCHITECTURE OF STABILIZATION POLICY UNDER INFLATION TARGETING

Abstract

Under the conditions of inflation targeting, the refinancing rate of the central bank (CB) becomes the main instrument of stabilization policy.. At the same time, the transmission mechanism of the exchange rate remains no less important. This article presents empirical study of monetary determinants for income (GDP) and consumer prices for 12 countries, which practice the monetary regime of inflation targeting. Monetary expansion is inflationary in the long run (except Thailand) and it contributes to GDP growth (except Romania and Indonesia), while the effects of an increase in the central bank reference rate are quite heterogeneous across countries. The exchange rate depreciation is inflationary either, while being contractionary in the real sector (except Thailand). The relationship between the Index of Economic Freedom from the Heritage Foundation and income is different across countries, while the anti-inflationary effect is not observed only in Turkey. The short-term determinants for income and consumer price inflation are country-specific. The short-term correction of long-term relationships is very strong in the Central and Eastern European countries and the Latin American countries. The consequences of raising the refinancing rate of the Central Bank are quite diverse in individual countries. It was concluded that, among other functional relationships, there is a significant long-term dependence of economic growth on foreign income and trade conditions, and consumer prices on world crude oil prices. The growing long-term trend of income is observed in the countries of Central and Eastern Europe, while the opposite is characteristic of the countries of Latin America. A downward inflation trend was obtained for almost all countries (with the exception of Turkey).