This article, firstly written in French, was published in a
Moroccan Journal "LE SOIR ECHOS", n° 254
February 13th, 2009
Inflation targeting in a
context of crisis (*)
During these fifteen last years, the
theory of the monetary policy underwent a
recasting of its old concepts in particular with
the appearance of new rules dictated by the
emergence of a new consensus of monetary
policy centered on the direct inflation targeting
as a new monetary policy strategy. This
approach, primarily founded on the forecast of
inflation, acts as a process in which the
instrument of the monetary policy is adjusted to
keep the inflation anticipated on its target
level. The target of inflation control is
considered as a framework that offer more
economic and financial judicious decision and
tend to increase the transparency and the
credibility of the monetary policy. By making
inflation as a principal objective, this new
framework of monetary policy constitutes an
alternative anchor to the other forms of nominal
anchoring, such as the exchange rate target
and the monetary aggregate target, which
appeared increasingly difficult to implement.
In addition, the inflation-targeting
regime cannot be implemented without the
respect of some institutional and technical
prerequisites. The experiment of several
countries also teaches us that a certain number
of challenges deserve to be noted before
choosing to practice this monetary policy
framework definitively.
On the practical level, this revival of the
monetary policy regime seems to constitute a
world tendency during the last decade in
particular with the adhesion of a significant
number of emerging countries to the group of
the developed countries, which have chosen the
inflation targeting since the beginning of 1990.
However, this quasi-unanimous reference to the
same mode for the control of the monetary
policy pleads for research about the practical
scope of inflation targeting in a turbulent world
Dr. Kamal El-OUALY
Economist
Kamal.eloualy@yahoo.fr
economic context. Which lesson at least could
we draw from its implementation until the
bursting of the financial crisis in 2008 and its
economic repercussions, which are announced
negative during 2009 ?
At the beginning, the inflation-targeting
regime was implemented during a period
marked by a fall of inflation. However, in
order to reveal its efficiency; this monetary
policy strategy should be practiced in a more
turbulent context. It is important to show that
during the period 2007-2008, this new
monetary consensus centered on the inflation
anchoring failed in two successive periods:
- The first period marked by the resurgence of
inflation throughout the world, in particular with
the rise of the energy prices and other
commodity prices. After more than one decade
of absence, inflationary uncertainties made
their great return, which make pressure on the
chain domestic price via the pass through
effect. The weak inflation observed up to 2007
was mainly due to the weakness of the oil
prices related to the low costs of labor in the
emerging countries. However, as soon as the
prices of oil and those of the food prices have
increased, the virtuous circle of the weak
inflation of the nineties yields place to a
resurgence of the inflation, which would
destabilize the growth, in particular with the
propagation of the rise of food and energy
prices on the other prices categories of
consumption. Initially, the energy prices
intensified between 2003 to 2007 in particular
during the first half of 2008. This rise of the oil
prices is the result of an regular increase in
demand since 2000, consequence of a strong
economic growth, in particular of the
industrialized nations of Asia. It’s also
exacerbated by the depreciation of the dollar
value compared to the euro.
 With the resurgence of inflation
throughout the world, the inflation-targeting
regime is exposed a real test. The countries
targeting inflation, which should to stabilize the
inflation rates, did not act at the convenient
time, for lack of effective instruments to prevent
the uncertain effects of exogenous shocks.
Moreover, as the central banks have found in
front of the imported inflation, so to decide
only using an adjustment of the interest rates
will be without effects on the domestic prices.
The behavior adopted by the majority of the
central banks was to temporize concerning the
rise of inflation without thinking that this could
be expensive in terms of credibility. However,
such behavior in relation to a persistent
volatility of inflation could call into question the
principle of the central bank independence by
validating the argument of A. Posen (1993)
and of B. McCallum (1996). Those economists
argued that autonomy of the central bank is
not a condition sufficient for the price stability.
- The second period is explained by the fact
why the inflationary risk, mentioned a long time
by several central banks to adjust the interest
rate to the rise, passes in the second plan in
particular with the bursting of the financial crisis
in 2008 and in a economic situation marked by
the recession and the fall of the energy prices.
The price of the barrel of oil oscillates around
40 US dollars, in January 2009, after having
reached a peak of 147 dollars into July 11,
2008. In fact, the risks with the rise weighing on
inflation attenuated. On the other hand, the
intensification of the financial crisis increased
the risks weighing on the growth, which justifies
the decision of the principal central banks to
reduce more their directing interest rates. The
world has moved from rising inflation to an
economic downturn.
From now on, the preoccupation of the
central banks, in the context of a major
financial crisis, is to start again the growth and
in the other hand to keep a solid anchoring of
anticipations of inflation. This appears very
crucial in period of economic and financial
uncertainty. A central bank forward looking
monetary policy should not omit a perfect
knowledge of fundamental economic to
anticipate the possible evolution of the
economy.
In fact, in front of the reality of
financial system crisis, which the economic
repercussions are disastrous, the central banks
had recourse to concrete actions such as the
financial support of the State, by circumventing
all forms of budgetary and monetary
orthodoxy to answer the crisis. This established
fact does not confirm the opinion of many
economists, at least in the short run, who
consider that a policy based on targets of
inflation is a policy of stabilization of the
production.
Indeed, it’s important to underline that
the mission of price stability so preached by the
central banks should not take primacy over that
of financial stability. These two missions should
interfere more for a total stability of the
economy. Moreover, the stability of the
financial system it is conceived as being one of
principal prerequisite for implementing the
inflation target ? Therefore, it is difficult to
know with certainty the advantages of
implementing the inflation targeting strategy in
a context marked by uncertainties and
recurring shocks of unforeseen supply and
demand, and which could lead to an economic
recession and an erosion of the credibility of
the monetary policy.
Finally, the implementation of the
inflation targeting strategy as well in the
industrialised countries as in the developing
countries shows that its application is not without
difficulty. It is a question of distinguishing two
major determinants from inflation. Initially the
volatility of the exchange rates combined with
the unpredictability of the energy prices on the
world market generate imported inflation.
Secondly, the phenomenon of uncertainties,
which increases the risks in the financial
markets, reduces the investment and
consequently the growth.
(*) Written in January 2008, this article is one of the
works performed by the author on monetary
economics and inflation targeting. For more
information cf, kamal. El-Oualy “The inflation
targeting in emerging countries: Its implementation
opportunities in Morocco”. Doctorate in Economics
Sciences with High Honours from the Faculty of
Economics Sciences of Fez, May 2008.