Three essays on monetary policy and inflation in developing countries

• Main Author: Shah, Imran Hussain
• Other Authors: Charemza, Wojciech
• Published: University of Leicester 2012
• Subjects: 332
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.551741

The principal objective of this thesis is to evaluate appropriate measures of inflation which are to be applicable for implementing monetary policy in developing countries. The first essay attempts to assess real effects of high inflation episodes for Indonesia, Malaysia and Pakistan. In order to investigate the real effects of high inflation episodes, the study adopts an indicator for the inflationary real effect, named inflationary real response (IRR), which is the difference between the expected and output-neutral inflation. Both the expected and output-neutral inflation are computed as the decomposition of shocks induced in the vector autoregressive (VAR) model. The main finding of this chapter is that there is a positive real effect in economic growth in the period after high inflation. The second essay investigates the responses of real output and inflation to oil price, aggregate supply and demand shocks in the four Asian developing countries; Indonesia, Malaysia, Pakistan, and Thailand. The structural VAR model is used to identify the different shocks and to explore the relative contributions of these shocks in explaining macroeconomic fluctuations. It is found that oil price shocks have negligible effects on economic activities for all the examined countries. However, aggregate supply and demand shocks are key sources of variation in output and inflation. The final essay examines whether the central bank should target a broader measure of the price index that incorporates stock prices alongside the prices of current goods and services. The primary contribution of this chapter is the estimation of a price index that can be efficiently utilised by central banks aiming to minimise output volatility. The results suggest that the central bank should use a price index that gives a sizeable weight to the fundamental component of stock prices to minimise output gap variance.