Russian Journal of Money and Finance

The third issue of the Russian Journal of Money and Finance: What new central banks learn about inflation

Today, central banks understand the nature of inflation and its mechanisms much better than 20-30 years ago, however, there are still quite a few blank spots in this topic. For example, it is not only high inflation that can be an issues but low inflation as well. Demographic and productivity changes may affect the inflation rate, and monetary policy may appear an inefficient instrument for controlling inflation when its dynamics is a subject to exogenous factors.

The third issue of the Russian Journal of Money and Finance is mainly dedicated to inflation and inflation targeting. Review by Andrey Sinyakov and Ivan Khotulev (Bank of Russia) reveals the main results of the studies presented at the conference Inflation: New Insights for Central Banks held by the Bank of Russia in June. Two papers presented are published in our journal: Petra Gerlach-Kristen, Rina Rosenblatt-Wisch (Swiss National Bank) and Richhild Moessner (BIS) suggest derived measures to estimate long-term inflation expectations for countries without inflation swap markets, and Erzsébet Éva Nagy and Veronika Tengely (Central Bank of Hungary) analyze the impact of external and domestic drivers of the Hungarian inflation.

Philipp Kartaev and Irina Luneva (Lomonosov Moscow State University) compare the efficiency of two inflation targeting regimes – pure and mixed (hybrid). Pure inflation targeting is a regime under which inflation is the only variable in a central bank’s objective function, while hybrid targeting, in addition to inflation, includes the exchange rate in monetary authorities’objective function. Modeling conducted on panel data of 32 countries evidence that countries using the hybrid regime show a higher probability of achieving the inflation target. A possible explanation of this rather paradoxical result is that a higher exchange rate volatility should trigger a rise in inflation expectations, and smoothing exchange rate fluctuations enhances the probability of meeting the inflation target.

Luis Araujo and Andrei Shevchenko (Michigan State University) unveil the existence of a trade-off between efficiency and information transmission comparing two trading protocols in markets with informational and search frictions: price posting and bargaining. In relatively stable markets (e.g., retail markets), price posting emerges as a prevailing trade mechanism and appears efficient. But if a market is characterized by a constant state of flux and uncertainty (e.g., the Federal Funds market), then buyers and sellers do better by participating in a series of bargaining sessions constantly updating their beliefs about the state of the market.

The final paper of the RJMF third issue by the economists from the Center for Macroeconomic Analysis and Short-Term Forecasting attempts to estimate financial sector development targets which provide for the best possible GDP performance while ensuring its growth sustainability along with price and financial stability. The study uses data from 63 emerging and advanced economies covering 1980 – 2014.

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