Mehdi Yazdani; Seyed Majid Momeni
Abstract
Inflation targeting is a monetary policy system that the central bank independence, the absence of fiscal dominance, the determinate and unique target and the efficient outline for prediction of inflationa are its requirements. However the target should be determine and checked by the monetary strategy. ...
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Inflation targeting is a monetary policy system that the central bank independence, the absence of fiscal dominance, the determinate and unique target and the efficient outline for prediction of inflationa are its requirements. However the target should be determine and checked by the monetary strategy. Also in successful countries to reducing inflation, structural reforms in economy such as public and banking sectors, have had an important role.
Meanwhile the investigation of other countries experience in regards inflation targeting, the study tries to suggest a monetary policy rule that its coefficients are time-varying. Hence using state space model and Kalman filter, the study tries to investigate Taylor and McCallum rules for Iranian economy during 1378:01-1393:04 which their coefficients are time-varying.
The results show that the monetary policy according to Taylor's and McCallum’s time-varying rules has respond to inflation and exchange rate changes and the non-time-varying coefficients such as GDP gap, dummy variable and the lag of policy variable.
Mehdi Yazdani; Seyed Komail Tayebi; Nafiseh Yazdani
Abstract
Economists believe that except the commitment of central bank about price stability, this institution should consider some arrangements for financial stability in macro level of economic. However, financial stability leads to smoothly and uniformly performance in different parts of financial system such ...
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Economists believe that except the commitment of central bank about price stability, this institution should consider some arrangements for financial stability in macro level of economic. However, financial stability leads to smoothly and uniformly performance in different parts of financial system such as financial institutions, markets and system of financial pay off (Cihak, 2007; Oosterloo and De Haan, 2004).
Moreover, the major parts of economic literatute have emphasized on central bank independence rather than price stability. Available studies discus that in addition to the price stability, the dependence of central bank leads to financial stability, so that regulatory and supervisory independence are necessary to achieve and maintain stability in financial sector of economic (Klomp and De Haan, 2009; Meade and Crowe, 2007; Cukierman, 2008).
This study tries to evaluate the relation between the dependence of central bank and some indices of financial stability using a dynamic panel data model during 1980-2012 in selected emerging market countries (namely are Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippine, Russia, South Africa, Thailand, Turkey and Iran). In the paper, different types of financial instability indices have been used which have been divided in three categories. The first category is as banking system indices (including change in ratio of bank liabilities to GDP, change in ratio of bank liquid reserves to bank assets, change in ratio of bank capital to assets, change in domestic credit provided by banking sector (% of GDP) and change in domestic credit to private sector (% of GDP)), the second is as risk and return indices (including change in real interest rate, change in interest rate spread and change in risk premium on lending) and the third is monetary authorities indices (including change of money and quasi money (M2) to GDP and change in net foreign assets to GDP).
The macroeconiomic control variables are the inflation rate, the economic growth rate, the change in exchange rate and the shocks of term on trade. Moreover gross domestic product per capita to mesure the differences in development level of countries, the budget deficit as an influent variable on central bank independence, the financial liberalization since of its role on risk of financial instutions and the insurance of deposits have been includeed to model. Also to consider the effect of globalization on financial instability, this variable has been added to model which may have positive or negative sign dependent on quality of golobalization phenomenon. Finally the net financial flows as a represenetive variable for international capital flows phenomena (including bonanza, sudden stop and capital flight) has been added to model which can consider the vulnerability of financial sytem to this outcomes.
The estimated results show that the dependence variable of central bank including political, economic and overall dependence variables, lead to decrease the financial instability in selected emerging market countries. Moreover, for other control variables, the theoretical expectations have been confirmed where the relationship between economic growth and financial instability is negative and the movements in term of trade, exchang rate and inflation lead to financial instability. Also the coefficient of budeget deficit shows that there is a direct link between rasie in budget deficit and financial instability via its effects on regularity of central bank. According to results, the insurance of deposit is a way which policy makers can control financial istability. Finally the effects of globalization on financial istability is positive which the phenomenon can arise some difficulties for emertging market economies.
As a policy implication for Iranian economy based on estimated results of model: i) the independence of central bank is critical for Iranian economy to stabilize the dynamic financial system, ii) the regular and sytematinc fiscal policies are necessitate for financial stability in Iranian econmy, iii) introducing new financial instruments and derivates such as deposit insurance are vital for financial stability in Islamic Banking and finally, iiii) as a buffering element for unfavorable effects of globalization on financial instability, the independence of central bank is determinant too.
