The aim of the thesis is to study the performance of emerging economies under the inflation targeting as a framework. This framework is characterized by the direct target that it has on inflation which should be achieved within a period. Inflation targeting was initially adopted by industrialized economies, and the outcomes throughout the years have been substantially good for other economies to join this framework. The dataset used is updated with data from after the financial crises allowing space for us to test another hypothesis about the importance of inflation targeting during the financial crises. We used difference to difference model to test our hypothesis and we concluded that inflation targeting does not have any significant statistical effect on the output growth, but it does have a statistical significant effect in the inflation rate. We also pointed out that the economies that were targeting inflation during the financial crises performed much better compared to the ones which did not. JEL Classification E31, E44, G01 Keywords Inflation targeting, emerging and developed economies, financial crises Author's e-mail sreshketa@gmail.com Supervisor's e-mail tomas.holub@cnb.cz

A presente tese é um estudo empírico sobre o regime de metas de inflação. Especificamente, concentramos o esforço de pesquisa na verificação da contribuição do regime de metas para a redução das taxas de sacrifício nos episódios de desinflação e na identificação das variáveis que determinam sua implementação, como estratégia de política monetária. A redução dos custos de desinflação é um dos benefícios atribuídos, em teoria, ao regime de metas de inflação. Os estudos empíricos anteriores a esse não encontraram, no entanto, evidências de redução das taxas de sacrifício nos episódios de desinflação realizados sob regime de metas. No capítulo um dessa tese examinamos a relação entre taxas de sacrifício e a presença do regime de metas utilizando uma amostra de 99 episódios de desinflação identificados nos países da OCDE e 46 episódios de desinflação identificados em países emergentes. Considerando-se os episódios de desinflação que se iniciaram pelo menos seis meses depois da implementação do regime, nossos resultados confirmaram os benefícios atribuídos em nível teórico ao regime de metas. Em 1990, a Nova Zelândia era o único país do mundo com regime de metas de inflação. Em 2006, vinte e dois países já haviam aderido ao sistema de metas. O crescimento do número de países que adotaram o regime de metas de inflação a partir de 1990 motivou uma pesquisa sobre os fatores determinantes para implementação dessa estratégia de política monetária, apresentada no capítulo dois. Considerando o grupo de países da OCDE, os resultados de um modelo de variável dependente binária indicaram que a taxa de inflação e a dívida pública como proporção do PIB alteram significativamente a probabilidade de adoção do regime de metas, enquanto que alternância de poder entre partidos e a volatilidade de choques de oferta não parecem ser fatores relevantes. Devido ao pequeno número de observações da amostra de países, utilizamos adicionalmente neste capítulo o método de boostrap paramétrico para a construção de intervalos de confiança e para os testes de especificação do modelo. Os resultados das simulações confirmaram os obtidos pela teoria assintótica. A análise do capitulo dois indicou que a opção pela estratégia do regime de metas não é aleatória. Uma conseqüência da violação da hipótese de exogeneidade na escolha do regime de metas - presente no estudo sobre metas de inflação e taxas de sacrifício no capítulo um - é que a possível correlação entre a razão de sacrifício e as variáveis que determinam a adoção ou não adoção do regime de metas de inflação pode levar à estimativas viesadas do efeito do regime de metas sobre as razões de sacrifício. No capítulo três examinamos os efeitos do regime de metas de inflação sobre as razões de sacrifício dos episódios de desinflação considerando endogeneidade na escolha do regime de metas, através de métodos de regressão baseados em propensity scores, para a correção de possíveis vieses no estimador dos efeitos. A análise dos episódios de desinflação nos países da OCDE confirma os benefícios teoricamente atribuídos ao regime de metas. / This doctoral thesis is an empirical essay about inflation targeting. The main objective is to verify the contribution of inflation targeting regime to diminish sacrifice ratios in disinflation episodes and identify the factors behind a country?s decision to choice this type of monetary policy strategy. The reduction of sacrifice ratios is one of the theoretically alleged benefits of inflation targeting. Previous empirical studies did not find, however, support to this result. In chapter one we examine the relation between sacrifice ratios and inflation targeting from a sample of 99 disinflation episodes identified in OECD countries and 46 episodes in emerging economies. Considering disinflation episodes starting at least six months after the adoption of inflation targeting regime, our results corroborate the theory. In 1990, New Zealand was the sole country worldwide with an inflation targeting regime in place. In 2006, twenty two countries had already adhered to this monetary policy modus operandi. Motivated by the impressive rise in the number of inflation targeters, we seek also to identify the factors that influence the implementation of inflation targeting. Running a Probit model for the set of OECD countries, we find that high past inflation and low debt levels increase the probability that a country will end up opting for the inflation targeting system, but the degree of political instability and incidence of external shocks do not seem to be important factors. Due to the small sample size, we construct additionally parametric boostrap confidence intervals and bootstrap specification tests. The results of simulations confirmed that obtained with asymptotic theory. The Probit model has revealed that the adoption of inflation targeting between countries is endogenous. As a consequence, the econometric model of chapter one can produce biased coefficient estimates. In chapter three we examine the effects of inflation targeting regime on sacrifice ratios considering endogenous choice of IT. We apply regression methods based on propensity scores to correct possible bias in the coefficient estimates of IT effects on sacrifice ratios. The results of OECD countries indicate that bringing down inflation entails much smaller output losses if the country inflation targets.

This thesis addresses interrelated issues that influence the implementation of monetary policy in low income countries (LICs). These include the role of inflation persistence, financial frictions and the potential impact of regime-changes or large shocks. The analysis is applied to data for the Ugandan economy. Chapter 3 extends the quantile regression approach to investigate inflation persistence in LICs. The results suggest mean-reversion for the whole sample, however, there is evidence of asymmetric mean-reversion within specific quantiles. In addition, it is noted that the level of persistence increased after 2006 and during the inflation-targeting period. The study also suggests that a measure of core inflation that is derived from wavelet techniques appears to provide a useful measure of this variable. Chapter 4 considers the role of financial frictions in Uganda. It makes use of a dynamic stochastic general equilibrium (DSGE) model that incorporates several small open-economy features. The model parameters are estimated with the aid of Bayesian techniques using quarterly macroeconomic data. The results suggest that the central bank currently responds to changes in the interest rate spread and that it may be possible to derive a more favourable sacrifice ratio by making use of a slightly more aggressive response to macroeconomic developments. Chapter 5 employs a Markov-switching DSGE model to consider the possibility of regime-switching behaviour. Two variants of regime-switching models are considered: One that incorporates regime-switching features in the monetary policy rule (only) and another that incorporates regime-switching features in both the monetary policy rule and in the volatility of the shock processes. Most of the parameters are again estimated with the aid of Bayesian techniques. The results suggest that the model parameters do not remain constant over the two regimes and the transition probabilities appear to capture important economic events. In addition, the out-of-sample evaluation suggests that the regime-switching models may provide a more accurate description of the data generating processes.

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Monetary policy changes that are unexpected by the investing public can generate great volatility and illiquidity in the equities market, and therefore may severely compromise the Federal Reserve’s ability to control the economy. Given the investing public’s power, their fear of uncertainty, and their impulsive nature to create and act upon uninformed expectations, it is imperative that the Federal Reserve uses any and all communication about monetary policy with the purpose of further advancing the their stability objectives. Initially, the Federal Reserve felt that changes in monetary policy were most effective if decided and implemented in private however over 50 years after its establishment, Ben Bernanke began to realize the power of transparency and communication. Given how recently its power was recognized and utilized, it is still a relatively new topic with various facets that have yet to be explored. This paper will carefully analyze these different facets of transparency. First it will explain why a lack of communication was originally considered to be the most effective way to implement monetary policy. Next, it will explore the relationship between the investing public’s power and their need for communication. And lastly, it will attempt estimate the best way to use communication to the Federal Reserve’s benefit, with special attention to the recent financial crisis of 2008 and how Ben Bernanke handled it. These results will reiterate the value of transparency between the Federal Reserve and the investing public about target federal funds rates and expected inflation, which will ultimately allow them to work together to achieve the same objectives.

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