Statistical Implications of Inflation Targeting

GETTING THE RIGHT NUMBERS

AND

GETTING THE NUMBERS RIGHT

EDITORS

CAROL S. CARSON

CHARLES ENOCH

CLAUDIA DZIOBEK

Papers presented at the

IMF Seminar on Statistical Implications

of Inflation Targeting, Washington, D.C.,

February 28-March 1, 2002

STATISTICS DEPARTMENT

INTERNATIONAL MONETARY FUND

© 2002 International Monetary Fund

Production: IMF Graphics Section

Cover design: Lai Oy Louie

Figures: Theodore F. Peters, Jr.

Typesetting: Choon Lee

Cataloging-in-Publication Data

Statistical implications of inflation targeting : getting the right numbers and getting the numbers right / editors, Carol S. Carson, Charles Enoch, Claudia Dziobek — [Washington, D.C.] : International Monetary Fund, Statistics Dept., 2002.

p. cm.

Papers presented at the IMF Seminar on Statistical Implications of Inflation Targeting, Washington, D.C., February 28-March 1, 2002. ISBN 1-58906-132-2

1. Inflation (Finance) — Statistics — Congresses. 2. International Monetary Fund — Congresses. I. Carson, Carol S. II. Enoch, Charles. III. Dziobek, Claudia Helene, 1956– IV. International Monetary Fund. Statistics Dept.

HG229.S73 2002

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Contents

• Foreword

• Acknowledgments

• Abbreviations

  • Part I. Information Requirements for Inflation Targeting

• Introduction to Part I

• 1. Anchoring Inflation Expectations

  • Horst Köhler

• 2. The Bank of Canada’s Approach to Inflation Targeting

  • Malcolm Knight, Robert Fay, and Brian O’Reilly

• 3. Statistical Implications of Inflation Targeting in South Africa

  • Pali J. Lehohla and Annette Myburgh

• 4. Informational Requirements of Inflation Targeting in the Philippines

  • Amando M. Tetangco Jr. and Ma. Cyd N. Tuano-Amador

• 5. The Experience of Statistics Sweden

  • Svante Öberg and Hans Lindblom

• 6. Information Requirements for Inflation Targeting: Observations Based on the Australian Experience

  • Glenn Stevens

    • Part II. Defining and Measuring the Target

• Introduction to Part II

• 7. The U.K. Office for National Statistics and the Inflation Target

  • Amanda Rowlatt

• 8. Eurostat’s HICP and the European Central Bank’s Definition of Price Stability

  • Vítor Gaspar

• 9. Design, Measurement, and Communication: Chile’s Experience with Inflation Targeting

  • Pablo García

• 10. Price Indices for Inflation Targeting

  • Adriaan M. Bloem, Paul A. Armknecht, and Kimberly D. Zieschang

    • Part III. Deriving Measures of Inflation and Inflation Expectations from the Market Data

• Introduction to Part III

• 11. The Bank of England’s Approach

  • Roger Clews

• 12. On Market-Based Measures of Inflation Expectations

  • Cedric Scholtes

• 13. Regime-Oriented Data Coverage Standards: Case Study of Inflation Targeting in Israel

  • Edward (Akiva) Offenbacher and Meir Sokoler

• 14. The Experience of Banco Central do Brasil

  • Gustavo Bussinger

    • Part IV. Implications for the IMF

• Introduction to Part IV

• 15. The Experience of the Czech National Bank

  • Oldrich Dedek

• 16. Inflation Targeting: Statistical Issues Suggested by the Experience of Six Emerging Market Countries

  • Edgar Ayales, Randall C. Merris, and Alfredo Torrez

• 17. Statistical Principles for Inflation-Targeting Regimes and the Role of IMF Data Initiatives

  • Armida San Jose, Graham L. Slack, and Subramanian S. Sriram

• 18. Usefulness of Private Inflation Forecasts in Inflation Targeting

  • Masahiko Takeda

    • Part V. Conclusions

• Introduction to Part V

• 19. Taking the Agenda Forward

  • Carol S. Carson, Charles Enoch, and Claudia Dziobek

• References

• Seminar Participants and Authors

• Chapter Appendices

• 3.1. Variants of the South African Overall Consumer Price Index and Percentage Changes for the Metropolitan Areas

• 3.2. Variants of the South African Consumer Price Index and Percentage Changes for the Metropolitan and Other Urban Areas

• 12.1. The Real Stochastic Discount Factor/Pricing Kernel

• 12.2. The Inflation Risk Premium

• 16.1. Exchange Rate Regimes and Anchors of Monetary Policy as of December 31, 2001

• 17.1. Summary of the Institutional Framework, Operational Issues, and Organizational Implications for Central Banks in Inflation-Targeting Countries

• 17.2. The IMF’s Data Quality Assessment Framework—Generic Framework

• Boxes

• 17.1. Data Quality Assessment Framework (DQAF)—Dimensions of Quality

• 17.2. Methodological Manuals

• 17.3. Forward-Looking Indicators and Metadata Posted on the National Summary Data Page (NSDP) and the Dissemination Standards Bulletin Board (DSBB)

• Tables

• 2.1. Group of 10: Absolute Terms of Trade Correlation

• 2.2. Canada: An Example of Useful Statistical Indicators

• 2.3. Canada: Selected Indicators Pertaining to Wage Negotiations

• 3.1. South Africa: Items and Products Whose Prices Are Collected Quarterly and the Months in Which They Are Surveyed

• 3.2. South Africa: Items and Products Whose Prices Are Collected Annually and the Month in Which They Are Surveyed

• 3.3. South Africa: Items and Products Whose Prices Are Collected at Various Times of the Year and the Months in Which They Are Surveyed

• 8.1. Euro Area: HICP Weights in 2001

• 9.1. Chile: Domestic Price Effects of the Oil Shock

• 12.1. Global Issuers of Inflation-Indexed Government Bonds

• 12.2. United Kingdom: Outstanding Index-Linked (IL) Gilts

• 12.3. Comparison of Inflation Risk Premium (IRP) Estimates

• 12.4. Ordinary Least Squares Regressions of Break-Even and Survey-Based Forecasts Against Actual Inflation (U.K.)

• 17.1. Coverage of Special Data Dissemination Standard (SDDS) Data Categories 322

• 17.2. Comparison of Target Price Index with Price Index in Dissemination Standards Bulletin Board (DSBB), National Summary Data Page (NDSP), and National Websites of SDDS Inflation-Targeting Countries

• 17.3. Operating Targets of Monetary Policy in Inflation-Targeting Countries and Their Dissemination in the DSBB, NSDP, and National Websites

• Figures

• 2.1. Canada: Total CPI and CPI Adjusted for the Effect of Changes in Indirect Taxes

• 2.2. Canada: Total CPI and Core CPI

• 2.3. Canada: Two Measures of Core Inflation

• 2.4. Canada: Monetary Policy Transmission Mechanism

• 2.5. Canada: Term Spread

• 2.6. Canada: Monetary Conditions Index

• 2.7. Canada: Real 90-Day Commercial Paper Rate

• 2.8. Canada: Stance Measure Based on Adjusted M1

• 2.9. Canada: Expected Three-Month Commercial Paper Rates, October 23 Fixed Announcement Date

• 2.10. Canada: Expected Three-Month Commercial Paper Rates, November 23 Fixed Announcement Date

• 2.11. Canada: Evolution of Expected Three-Month Commercial Paper Rates up to the October 23 Fixed Announcement Date

• 2.12. Canada: Implied Overnight Versus Overnight Target

• 2.13. Canada: Comparison of Selected Inflation Expectations

• 2.14. Canada: Long-Term Dispersion of Inflation Expectations

• 2.15. Canada: Ratio of Long-Term Business Credit to Total Business Credit

• 2.16. Canada: CPI Adjusted for the Effect of Changes in Indirect Taxes

• 3.1. South Africa: Annual Percentage Change in the Derivatives of the CPI for the Metropolitan Areas

• 3.2. South Africa: Annual Percentage Change in the Derivatives of the CPI for the Metropolitan and Other Urban Areas

• 6.1. Australia: Inflation

• 6.2. Australia: Underlying Inflation

• 8.1. Euro-Area Countries: Inflation Rates in the 1990s

• 9.1. Chile: Quarterly Inflation Following a Shock

• 10.1. United States and Norway: Major Price Indices

• 11.1. United Kingdom: Spot Curves as of February 20, 2002

• 11.2. United Kingdom: Two-Week Forward Curves as of February 20, 2002

• 11.3. United Kingdom: Annualized Growth Rates of Retail Prices

• 11.4. United Kingdom: Year-on-Year Changes of Retail Price Indices and Policy Rate

• 11.5. United Kingdom: Implied 12-Month Inflation Forward Rate, 7 Years Ahead

• 11.6. United Kingdom: Implied 12-Month Inflation Forward Rates, 5 and 15 Years Ahead

• 12.1. United Kingdom: Break-Even Inflation Forward Curves

• 12.2. International Break-Even Inflation Yields Derived from Government Securities

• 12.3. United Kingdom: Forward Curves for December 20, 1999

• 12.4. United Kingdom: Two-Year Break-Even Inflation and Basix Survey Spot Rates Against Retail Price Index (RPI) Inflation Outturns

• 12.5. United Kingdom: Difference Between Two-Year Break-Even and Survey-Based Inflation Expectations

• 12.6. United Kingdom: One-Year Break-Even Inflation Forward Rate Ten Years Out Since 1985

• 13.1. Israel: Market-Based Inflation Expectations (12 Months Ahead), Forecasts of Professionals for the Next 12 Months, Actual Inflation, and the Inflation Target

• 13.2. Israel: Market-Based Inflation Expectations—“Yield” Curves

• 13.3. Israel: Inflation Expectations for 12 Months—Model, Market, and Forecasters

• 13.4. Israel: Implied Forward Nominal Interest Rates

• 13.5. Israel: Implied Volatility Derived from Three-Month Forex Options, and Ratio Between Six-Month and Three-Month Implied Volatility

• 13.6. Israel: Implied Volatility from Call Options According to Strike Price (Smile)

• 13.7. Israel: 12-Month Forecasts of Professional Forecasters

• 13.8. Israel: Composition of Public’s Financial Assets Portfolio

Foreword

In recent years, macroeconomic policy formulation has moved to more explicit use of statistics; at the same time, added attention is being given to the development of forward-looking indicators. A prominent example is the monetary policy framework of inflation targeting that is being adopted by a growing number of countries. While many of the conceptual aspects of inflation targeting have been studied in detail in recent years, there has been little attention to statistical issues: Which statistics are needed? What does it take to compile them? And what is the role of the public sector, including the IMF, in encouraging good practice in compilation and use?

Monetary policy committees, rather than focusing exclusively on money and credit aggregates, look increasingly at market-based statistics—for instance, at asset prices and market-derived implicit inflation forecasts. Such data have traditionally not been integrated into a country’s typical data framework. The Seminar on the Statistical Implications of Inflation Targeting, held in Washington, D.C., during February 28-March 1, 2002, provided an opportunity for statistical agencies and central banks to explore together the issues that are of common interest in this regard. The importance of developing new forms of collaboration between statistical agencies and central banks emerged as a central theme of the seminar.

The seminar examined country experience in these areas. Some areas were identified where inflation targeting requires additional or more detailed statistics from those used hitherto. Even more important, seminar participants emphasized the greater discipline involved in handling information, the added transparency, and hence the enhanced focus on data quality. We hope that the seminar proceedings provide central banks, statistics agencies, academics, and outside observers with some new ideas and some guidance on the information aspects of inflation targeting regimes.

Carol S. Carson

Charles Enoch

Claudia Dziobek

Acknowledgments

Many of our colleagues helped to put this volume together. The editors gratefully acknowledge overall guidance from Thomas McLoughlin; editorial support from James McEuen, Ellen Coughlin, and Joan Gibson; research support from Silvano Spencer and Mbaye Gueye; and administrative assistance from Niccole Braynen-Kimani, Elia Cadena, Janice Irving, Lidia Tokuda, and Kris Bengtson. Jennifer Kelly coordinated the administrative arrangements for the seminar.

Abbreviations