Róisín O'Sullivan

Inflation Targeting and Relative Price Variability: What Difference Does Inflation Targeting Make?

This article studies the effects of inflation targeting (IT) on relative price variability (RPV) using a data set of twenty countries comprising both targeters and nontargeters. We find that a decline in mean inflation after IT adoption is not necessarily associated with a similar fall in RPV and that what matters most for the structural changes in RPV is the initial inflation regime prior to the adoption of IT rather than IT adoption itself. IT adoption impacts the shape of the underlying relationship between inflation and RPV in countries with initially high inflation rates, moving it from monotonic to the U-shaped profile observed consistently for countries with low-inflation regimes. The minimum point of this U-shaped curve is indicative of the publics expectations of inflation and is very close to the announced target for inflation in most of the countries we study.

Foreign bank presence in emerging markets: help or hindrance to banking system stability?

With financial liberalization during the 1990s, there was a marked increase in the involvement of foreign banks in emerging market economies. This study uses data from 32 emerging markets for the period 1999 to 2005 to investigate whether the presence of foreign banks promotes or hurts the stability of the banking systems in these economies. We find consistently that a greater presence of foreign banks does not harm banking system stability and, under some definitions, is associated with a statistically significant fall in the probability of a banking crisis. This result is robust across different ways of distinguishing foreign from domestic banks, thus providing useful information to policy makers and banking regulators.

Monetary policy regime change and regional inflation dynamics: looking through the lens of sector-level data for Korea: Monetary policy regime change and regional inflation dynamics

This paper explores the impact of the adoption of inflation targeting (IT) on the dynamics of city-level inflation in Korea using both aggregate and sector-level data. When looking at aggregate regional inflation, we find that the mean, volatility and persistence fell in all cities in the wake of the monetary policy regime change, consistent with other evidence in the literature. We also note a narrowing of the dispersion of regional inflation across cities and a greater degree of regional co-movement. Delving more deeply into the disaggregate data reveals additional insights however. For most of the changes we observe in the dynamics of regional inflation, we find that the aggregate effects are being driven primarily by sectors that fall into the ‘Services’ category. We posit that the impact of better anchored inflationary expectations is primarily on the less-traded services sectors of the economy, where the domestic monetary policy framework has a relatively larger influence compared with globally-traded commodities. When it comes to the increased co-movement observed across regions under IT regime, however, it is the ‘Commodities’ sectors rather than ‘Services’ that are responsible, probably because services inflation becomes relatively more influenced by local factors once it has stabilized within the target range. We show that this sectoral heterogeneity can be explained by the difference in price stickiness such that sectors in which prices are adjusted less frequently tend to have a larger response under the new monetary policy regime.

Heterogeneous Response of Disaggregate Inflation to Monetary Policy Regime Change: What Can Be Learned from Canada’s Adoption of Inflation Targeting?

This paper explores the impact of monetary policy regime change on sectoral and regional inflation by analyzing the case of Canada and its adoption of inflation targeting (IT). Using disaggregated CPI data for Canada from 1978, we find that responses to the change in the monetary policy framework are quite heterogeneous, particularly across sectors. While inflation series in the traditionally volatile commodity sectors exhibit weak responses to the regime change, those in the so-called core sectors are highly responsive. This pattern is evident in both national and provincial level data, indicating that it is the core sectors that are crucial for the transmission of a monetary policy regime change. Further analysis based on a common factor model reveals that common shocks, such as those associated with the monetary policy framework, account for only a small portion of the variation in sectoral inflation, and that their relative importance has decreased after IT adoption in many core sectors. Interestingly, considerable variation exists even across the core sectors in the strength of the regime change effect. We document that this heterogeneity is meaningfully correlated with some measurable sector-specific characteristics; sectors with a lower degree of prices stickiness and a lower degree of tradability appear more sensitive to the change in monetary policy regime.