№ 5/2023

Fìnansi Ukr. 2023 (5): 108–128https://doi.org/10.33763/finukr2023.05.108

MONETARY POLICY

KHOKHYCH Dmytro ¹, BORTNIKOV Gennadiy ²

¹Kyiv National Economic University named after Vadym Hetman
OrcID ID : https://orcid.org/0000-0003-3787-939X
²SESE “The Academy of Financial Management”
OrcID ID : https://orcid.org/0000-0001-8388-6721

International experience in reforming monetary regimes

Introduction. The article studies two main monetary regimes in the process of monetary reform of central banks: a target-based regime and a rule-based regime. Inflation targeting is the most common rule of monetary policy. Using the key rate as a monetary policy tool can ensure price stability and economic growth.
Problem Statement. Using the interest rate rule of inflation targeting, the central bank has certain advantages over the target variables. If preferences change unexpectedly, they are not taken into account by economic agents as quickly and act as an exogenous shock to the economy. This allows the central bank to test its policy against a rule that is potentially persistent in many cases of macroeconomic models.
The purpose is to evaluate the reforms of the monetary regimes of the Reserve Bank of New Zealand and the Federal Reserve System, which are based on legally established rules and instruments of monetary policy, which enables the central bank to make effective monetary decisions to achieve price stability and sustainable employment.
Methods. The Taylor rule was used to test the hypothesis that there is a relationship between the inflation target and the variables of the Taylor function, including the gap between GDP and potential GDP, as well as the determination of the key rate based on the quantitative parameters of the target function. This confirms the expediency of applying the Taylor rule when implementing the inflation targeting regime.
Results. Reforms of monetary regimes were aimed at clarifying the political responsibility of central banks, strengthening their independence in making decisions related to monetary policy objectives. The reforms were supposed to contribute to increasing the level of transparency by improving the effectiveness of the communication policy, which consisted in transmitting policy decisions from the central bank to the public and signaling future political intentions. In general, the responsibility in the inflation targeting regime is enhanced by the public nature of the assumed obligations related to the announced goal and the requirements put forward by the central bank regarding its implementation. Achieving the goal becomes an indicator of the central bank's effective activity.
Conclusions. Many of the aspects that were introduced in New Zealand and the US – the public commitment to an inflation target, high levels of transparency and accountability – are now considered the best practice in monetary policy. Making targets public promotes accountability, especially if the central bank has a single policy objective – price stability or an inflation target. Otherwise, broad independence in decision-making may make the central bank less accountable, and therefore independence should be clearly linked to the objectives rather than the choice of instruments, which is the best strategy for central bank reform.

Keywords:monetary regime, Taylor rule, key rate, inflation targeting, monetary policy, central bank, price

JEL: E50, G21

KHOKHYCH D. . International experience in reforming monetary regimes / D. . KHOKHYCH, G. . Bortnikov // Фінанси України. - 2023. - № 5. - C. 108-128.

Article original in Ukrainian (pp. 108 - 128)

Download

Downloads :93

1. Kydland, F., & Prescott, E. (1977). Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy, 85 (3), 473–491. doi.org/10.1086/260580
2. Friedman, M., & Schwartz, A. J. A. (1963). Monetary history of the United States, 1867-1960. Princeton, N.J.: Princeton University Press.
3. Taylor, J. (1993). Discretion versus Policy Rules in Practice. Carnegie Rochester conference series on public policy, 39, 195–214. doi.org/10.1016/0167-2231(93)90009-L
4. Clarida, R., Galí, J., & Gertler, M. (2000). Monetary policy rules and macroeconomic stability: evidence and some theory. The Quarterly Journal of Economics, 115 (1) 147–180. doi.org/10.1162/003355300554692
5. Levin, A., & Williams, J. (2003). Robust Monetary Policy with Competing Reference Models. Journal of Monetary Economics, 50 (5), 945–975. doi.org/10.1016/S0304-3932(03)00059-X
6. Ilbas, P., Roisland, O., & Sveen, T. (2012). Robustifing Optimal Monetary Policy Using Simple Rules as Cross-Checks. Research Working Paper, No. 2012/22. doi.org/10.2139/ssrn.2269236
7. Tillmann, P. (2012). Cross-Checking Optimal Monetary Policy with Information from the Taylor Rule. Economics Letters, 117 (1), 204–207. doi.org/10.1016/j.econlet.2012.05.009
8. Clarida, R., Gali, J., & Gertler, M. (1999). The Science of Monetary Policy: A New Keynesian Perspective. Journal of Economic Literature, 37 (4), 1661–1707. doi.org/10.1257/jel.37.4.1661
9. Walsh, C. (2003). Accountability, Transparency, and Inflation Targeting. Journal of Money, Credit and Banking, 35 (5), 829–849. doi.org/10.1353/mcb.2003.0041
10. Pokorny, T. (2021). Explaining Czech inflation by a time-varying Taylor rule. s. l. Faculty of Economics of Prague University of Economics and Business.
11. Mandler, M. (2007). The Taylor rule and interest rate uncertainty in the US 1955-2006. Giessen: University of Giessen.
12. Taylor, J. (2012). Monetary Policy Rules Work and Discretion Doesn’t: A Tale of Two Eras. Journal of Money, Credit and Banking, 44 (6), 1017–1032. doi.org/10.1111/j.1538-4616.2012.00521.x
13. Meltzer, A. (1993). Commentary: The Role of Judgment and Discretion in the Conduct of Monetary Policy. Changing Capital Markets: Implications for Monetary Policy. Federal Reserve Bank of Kansas City.
14. Walsh, C. (2010). Monetary Theory and Policy (3rd Ed.). MIT Press.
15. Walsh, C. (1995). Is New Zealand’s Reserve Bank Act of 1989 an Optimal Central Bank Contract? Journal of Money, Credit and Banking, 27 (4), (1), 1179–1191. doi.org/10.2307/2077796
16. Walsh, C. (1995). Optimal Contracts for Central Bankers. American Economic Review, 85 (1), 150–167.
17. Sherwin, M. (1999, July 1). The Origins of New Zealand’s Inflation Targeting Regime and Its Evolution over the Past Decade (Speech to the New Zealand Association of Economists Conference, Rotorua, New Zealand).
18. Debelle, G., & Fischer, S. (1994). How Independent Should a Central Bank Be? Carnegie Rochester Conference Series on Public Policy, 38, 195–225.
19. Phelps, E. S. (1968). Money Wage Dynamics and Labor Market Equilibrium. Journal of Political Economy, 76 (4), (2), 678–711. doi.org/10.1086/259438
20. Svensson, L. (1997). Optimal Inflation Targets, “Conservative”, Central Banks, and Linear Inflation Contracts. doi.org/10.2139/ssrn.1325
21. Blinder, A., Ehrmann, M., Fratzscher, M., De Haan, J., & Jansen, D.- J. (2008). Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence. Journal of Economic Literature, 46 (4), 910–945. doi.org/10.1257/jel.46.4.910
22. Crowe, C., & Meade, E. (2007). The Evolution of Central Bank Governance around the World. Journal of Economic Perspectives, 21 (4), 69–90. doi.org/10.1257/jep.21.4.69
23. Cukierman, A. (2008). Central Bank Independence and Monetary Policymaking Institutions – Past, Present and Future. European Journal of Political Economy, 24 (4), 722–736. doi.org/10.1016/j.ejpoleco.2008.07.007
24. Dincer, N., (2014). Eichengreen B. Central Bank Transparency and Independence: Updates and New Measures. International Journal of Central Banking, 10 (1), 189–253. doi.org/10.2139/ssrn.2579544
25. Geraats, P. (2009). Trends in Monetary Policy Transparency. International Finance, 12 (2), 235–268. doi.org/10.1111/j.1468-2362.2009.01239.x
26. Walsh, C. (1987, Winter). Monetary Targets and Inflation: 1976–1984. Economic Review (Federal Reserve Bank of San Francisco), pp. 5–16.
27. Ruge-Murcia, F. (2014). Do Inflation-Targeting Central Banks Implicitly Target the Price Level? International Journal of Central Banking, 10 (2), 301–326.
28. Walsh, C. (1986). In Defense of Base Drift. American Economic Review, 76 (4), 692–700.
29. Athey, S., Atkeson, A., & Kehoe, P. (2005). The Optimal Degree of Discretion in Monetary Policy. Econometrica, 73 (5), 1431–1475. doi.org/10.1111/j.1468-0262.2005.00626.x
30. Canzoneri, M. B. (1985). Monetary Policy Games and the Role of Private Information. American Economic Review, 75 (5), 1056–1070.
31. Taylor, J. (2011). The Rules-Discretion Cycle in Monetary and Fiscal Policy. Finnish Economic Papers, 24 (2), 78–86.
32. Taylor, J. (2013). The Effectiveness of Central Bank Independence vs. Policy Rules. Business Economics, 48 (3), 155–162. doi.org/10.1057/be.2013.15
33. Woodford, M. (2010). Financial Intermediation and Macroeconomic Analysis. Journal of Economic Perspectives, 24 (1), 21–44. doi.org/10.1257/jep.24.4.21
34. Levin, A., Wieland, V., & Williams, J. (1999). Robustness of Simple Monetary Policy Rules under Model Uncertainty. In Taylor, J. B. (Ed.). Monetary Policy Rules. Chicago: Chicago University Press. doi.org/10.2139/ssrn.148695
35. Rudebusch, G. (2002). Term Structure Evidence on Interest Rate Smoothing and Monetary Policy Inertia. Journal of Monetary Economics, 49 (16), 1161–1187. doi.org/10.1016/S0304-3932(02)00149-6
36. Benhabib, J., Schmitt-Groh´e, S., & Uribe, M. (2001). The Perils of Taylor Rules. Journal of Economic Theory, 96 (1–2), 40–69. doi.org/10.1006/jeth.1999.2585
37. Svensson, L. (2003). What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules. Journal of Economic Literature, 41 (2), 426–477. doi.org/10.1257/.41.2.426
38. Taylor, J., & Williams, J. (2010). Simple and Robust Rules for Monetary Policy. In Taylor, J. B., & Woodford, M. (Eds.). Handbook of Monetary Economics, vol. 3, pp. 829–859. Elsevier. doi.org/10.1016/B978-0-444-53454-5.00003-7
39. Walsh, C. (2015, September). Goals and Rules in Central Bank Design. International Journal of Central Banking. doi.org/10.2139/ssrn.2597978