Application of monetary regimes in monetary policy decision-making process

Abstract

Introduction. The article studies two main monetary regimes in the process of monetary reform of central banks: a target-based regime and a rule-based regime. Inflation targeting is the most common rule of monetary policy. Using the key rate as a monetary policy tool can ensure price stability and economic growth. Problem Statement. Using the interest rate rule of inflation targeting, the central bank has certain advantages over the target variables. If preferences change unexpectedly, they are not taken into account by economic agents as quickly and act as an exogenous shock to the economy. This allows the central bank to test its policy against a rule that is potentially persistent in many cases of macroeconomic models. The purpose is to evaluate the reforms of the monetary regimes of the Reserve Bank of New Zealand and the Federal Reserve System, which are based on legally established rules and instruments of monetary policy, which enables the central bank to make effective monetary decisions to achieve price stability and sustainable employment. Methods. The Taylor rule was used to test the hypothesis that there is a relationship between the inflation target and the variables of the Taylor function, including the gap between GDP and potential GDP, as well as the determination of the key rate based on the quantitative parameters of the target function. This confirms the expediency of applying the Taylor rule when implementing the inflation targeting regime. Results. Reforms of monetary regimes were aimed at clarifying the political responsibility of central banks, strengthening their independence in making decisions related to monetary policy objectives. The reforms were supposed to contribute to increasing the level of transparency by improving the effectiveness of the communication policy, which consisted in transmitting policy decisions from the central bank to the public and signaling future political intentions. In general, the responsibility in the inflation targeting regime is enhanced by the public nature of the assumed obligations related to the announced goal and the requirements put forward by the central bank regarding its implementation. Achieving the goal becomes an indicator of the central bank's effective activity. Conclusions. Many of the aspects that were introduced in New Zealand and the US – the public commitment to an inflation target, high levels of transparency and accountability – are now considered the best practice in monetary policy. Making targets public promotes accountability, especially if the central bank has a single policy objective – price stability or an inflation target. Otherwise, broad independence in decision-making may make the central bank less accountable, and therefore independence should be clearly linked to the objectives rather than the choice of instruments, which is the best strategy for central bank reform.