6 Ocak 2013 Pazar

Most Famous Inflation Targeting Cases: Israel and UK Cases

Israel Case
Monetary policy in Israel has gone through major changes in recent years where the inflation escalated to triple digits. Therefore Israel established a stabilization program which started after June 1985 depending on a policy that has been trying to sustain a fixed but adjustable nominal exchange rate, which was considered a key nominal anchor in the fight against inflation. Throughout this first phase, from 1986 to 1991, inflation stayed in the range of 16–20% as a yearly average. The second phase, from 1992 to 1996, they have changed the exchange rate policy by depending on a crawling exchange rate band and by adapting an explicit inflation target.[1]

Disinflation in Israel has been a relatively slow process. It took more than a decade for the rate of inflation to fall from about 18 percent per year in the late 1980s to less than 4% per year in the late 1990s. For the years 2000 and 2001 the government has set an inflation target range of 3-4%.

When we look at the following figure that depicts the comparison between the actual and the targeted inflation rates, we see that Israel can be said to be successful in decreasing the inflation.

Annual Inflation Rates: Israel
 (Source: Bank of Israel, “Monetary Policy Rules and Transmission Mechanisms under Inflation Targeting in Israel”,  http://www.bankisrael.gov.il/deptdata/mehkar/papers/dp0001e.pdfl)

United Kingdom Case

As being one of the most developed markets in the world, United Kingdom tried to apply an appropriate monetary policy through Bank of England. But when we look at the major developments in United Kingdom’s economical events, we can say that:[2]
  • In 1970s, the economy has been stagflated and the monetary policy was very weak.
  • After 1970’s, the economy has been shifted into a tighter monetary policy in 1980’s. we can see financial liberalization but in the absence of credible framework
  • After these events UK entered into European Exchange Rate Mechanism (ERM) in 1990
  • But after the Black Wednesday in 1992, UK exited from ERM
  • In 1992 the development of Inflation Targeting started.
After the country started to target inflation in 1992, inflation has been very low in the United Kingdom. This table below denotes that inflation (using the former RPIX measure) has been steady since 1992.

RPIX and CPI rate of United Kingdom
(Source: Thompson, “Retail Prices Index”, http://www.incomesdata.co.uk/statistics/rpi_92_94.htm)

In order to make a comment on the inflation targeting success of the countries other than Turkey, we can say that they have benefited from applying this policy. The following table shows us the success of each country in inflation targeting

Inflation Targeting Success in Some Countries

[1] Leonardo Leiderman and Gil Bufman,”Inflation Targeting Under a Crawling Band: Lessons from Israel”, http://www.imf.org./external/pubs/ft/seminar/2000/targets/strach9.pdf
[2] Rachel Lomax, “Inflation Targeting in the United Kingdom”, http://www.bnro.ro/En/Prez/E20050330uk.pdf

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