Price stability and inflation targeting in commodity economies: macroeconomics versus a political economy?
Loading...
Date
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Visnyk of the National Bank of Ukraine, No. 244, 2018, pp. 4-24.
Abstract
In this study, the author argues that maintaining price stability in commodity economies is influenced by their resource rent distribution, and that economic stability is extremely sensitive to the nature of a political regime. The commodity factor alone is shown not to be an impediment to maintaining price stability and implementing inflation targeting. An empirical analysis based on data from 68 resource-rich countries provides evidence that the link between the timing of the implementation of inflation targeting and resource wealth variables is not skewed towards resource-poor countries. This study finds that among democracies, inflation targeters demonstrate the best price stability parameters, the most flexible exchange rates, more independent central banks, and more diversified economies, while among autocracies, the best parameters are seen in countries that have sovereign wealth funds.
Description
The above generalizations imply that resource wealth per se does not represent a challenge to price stability or a factor that impedes the implementation of inflation targeting. The main factor at play here is the presence of a political regime within which price stability is not compromised during the struggle for rent. Because of this, the instrumental maintenance of such stability can be effectively implemented through a monetary regime of inflation targeting and/or a fiscal regime of countercyclical buffers. Projecting this paper’s conclusions on to the domestic situation exposes the critical importance of developing relevant institutions for ensuring price stability in Ukraine, given that it is a commodity-oriented economy. These institutions include, first and foremost, an independent central bank that is oriented towards meeting the objectives of price and financial stability. They also include fiscal regulations and medium-term budget planning to minimize the impact of the government’s discretionary decisions on macroeconomic development.
Keywords
Political regimes also play an important role from the perspective of the introduction of counter-cyclical fiscal buffers. Where fiscal policy does not create reliable prerequisites for macroeconomic stability, central banks’ capability to offset the pro-cyclicality of commodity prices is a result of institutional quality – to a much greater extent than the way in which institutional quality generates a counter-cyclical bias in fiscal policy. Put differently, price stability and its inflationtargeting-based maintenance is associated mainly with democratic political regimes that enable financial development, thereby positively impacting the accessibility of flexible-exchange-rate setting with a counter-cyclical objective., Keywords: price stability, commodity economies, inflation targeting political regimes.central bank independence
Citation
Koziuk V. Price stability and inflation targeting in commodity economies: macroeconomics versus a political economy? / Viktor Koziuk // Visnyk of the National Bank of Ukraine, No. 244, 2018, pp. 4-24.