Inflation targeting in the Armenian context King Banaian, David Kemme and Grigor Sargsyan AIPRG conference, 4/21/06

Inflation targeting is coming to Armenia Transition began in January. Country has found problems with quantitative targets. We provide evidence that supports this view. Opinions of inflation targeting for developing and transition countries are changing. Poland, Hungary and the Czech Republic were early adopters; many others are joining in.

Aggregate targeting has had problems

Velocity hasnt been very stable

Suppose a very simple model Simple IS curve, Phillips curve and a policymaker loss function. Imagine first perfect foresight. Minimize L. Then imagine a Taylor rule in both inflation and output. Inflation targeting means σ 2 = 0. r t = r * + 1 ( t - * ) - 2 (g t - g t * )

Response to supply shocks

Response to demand shocks

GMM estimates ParameterCoefficient valuet-statistic α β γ δ constant

The path of interest rates if Armenia had used a Taylor rule

SVAR estimation performed e y =b 11 u y e p =b 22 *u p e r =e p + b 33 *u r +a 34 *e ε e=b 31 *e y +b 32 *e p +b 33 *e ε +a 34 *u ε e y = 2.44*u y e p = 2.175u p e r = e p *u r +*e ε e e = * e y *e p -.008* e r *u ε

SVAR impulse response analysis

Conclusions Inflation targeting set for Transition period will need managing to gain full benefits to reputation from transparency. Taylor-rule modeling appears to fit the Armenian case, particularly if augmented by real exchange rate. What are the implications of this for IFT? We are testing that now.