Establishing Initial Conditions in Support of Inflation Targeting

Issues in Monetary and Fiscal Policy in Small Developing States

“…Although the statutes under which central banks have been set up have specified as a goal monetary stability, which would mean domestic price stability and stability of exchange rate, none of them pursues an explicit inflation target rate. The pre-conditions 5 required for inflation targeting (Carare et al, 2002) do not exist in any PIC. Although some of the PICs, including Fiji, might have fulfilled some of the pre-requirements such as monetary policy instrument independence, a low and stable inflation record, good communication and good public relations record, one important requirement is missing, namely that of a perfectly flexible exchange rate regime.…”

“…5. The requirements are: (i) there should be a mandate to pursue an inflation objective including sufficient central bank autonomy to set monetary instruments accordingly and transparency in policy formulation and implementation; (ii) inflation target will not be subordinated; (iii) country should have stable external position; (iv) the country should have maintained low inflation; (v) the financial system should be developed so that monetary policy is not sidetracked by concerns about the health of financial institutions; (vi) financial markets are well developed such that monetary policy is implanted with indirect instruments; (vii) there should be a clear understanding of the link between monetary policy stance and inflation so that appropriate instruments can be effectively implemented; (viii) exchange rate objectives must be clearly subordinated to inflation target; (ix) fiscal policy and public debt management should be co-ordinated in support of inflation target; (x) there should be a clear separation between money creation and government funding need (Carare et al, 2002).…”

Current Issues in the Design and Conduct of Monetary Policy

“…In this context, exchange rate arrangements with limited flexibilitycrawling pegs or target zones--{;ould coexist with inflation targeting as long as the latter has priority. Also, in a flexible exchange rate regime, central bank intervention in support of the , A detailed exposition of inflation targeting pre-conditions can be found in Carare, Schaechter, Stone, and Zelmer (2002).…”

“…Agenor (2002);Carare, Schaechter, Stone, and Zelmer (2002);Masson, Savastano, and Sharma (1997); and Schaechter, Stone, and Zelmer (2000).…”

Interest Rate Pass-Through in Romania and Other Central European Economies

“…In addition, the lending policies of banks are often found to be price inelastic with respect to interest rates in the short run, because other, non-interest rate factors, like adjustment costs and, sometimes, directed lending, play a substantial role (see e.g. Cottarelli and Kourelis (1994), Schaechter, Stone, and Zelmer (2000), or Carare et. al.…”