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    Central Bank Credibility and Exchange Rate Volatility: A Comprehensive Bibliometric Analysis

    Greenberg     January 21, 2025 in News - 27 Minutes


    1. Introduction

    The debate on the credibility of central banks has become a hot topic in both the public and academic spheres regarding monetary policy. Growing expectations of transparency and accountability towards central banks, which have gained independence over the years (Eijffinger & Geraats, 2006), are increasingly evident. A key element of this credibility lies in its influence on public expectations (van der Cruijsen et al., 2010), an importance amplified by the rise of monetary and financial markets. The effectiveness of monetary policy heavily relies on its capacity to accurately influence these expectations. The proper management of these expectations offers multiple benefits, such as reducing uncertainty, better planning for market participants, increased interest rate stability, and more effective monetary policy (Issing, 2005). In response to these challenges, new academic literature is emerging, exploring the economic implications of the enhanced credibility of central banks and its impact on the effectiveness of monetary policy.

    Although these studies have mainly examined specific cases without allowing easy generalization, or have developed indices to evaluate the credibility of specific central banks, they represent a crucial step in understanding this essential aspect of economic policy. While the development of these indices has allowed researchers to more precisely explore the effects of credibility on exchange rate volatility and even suggest an optimal level of credibility, it should be noted that all these indices are based on the assumption that the availability of more abundant or more precise information automatically leads to greater transparency, without considering potential frictions related to how information is communicated.

    Therefore, these indices may not always provide an accurate measure of central bank credibility, as central banks may adopt innovative approaches to enhance it that are not captured by conventional conceptions. Ultimately, credibility assessments based on these standardized indices may not be reliable in certain situations (van der Cruijsen et al., 2010). Given the lack of studies on this subject, the present research fills this gap by examining the relationship between central bank credibility and exchange rate volatility from both theoretical and empirical perspectives. This study stands out for its objective of conducting a comprehensive bibliometric analysis of the impact of central bank credibility on exchange rate volatility, encompassing all relevant publications since the introduction of the Web of Science Core Collection (WoS) database in 1990 until 2024. This approach aims to shed light on the evolution of this specific field. Its contribution is significant, not only for enriching the existing body of research in the banking sector but also for providing precise and contemporary guidance to researchers and policymakers. This analysis highlights current trends and the overall structure of research, while identifying key contributors and areas of study. The subsequent sections of this article will be structured as follows: the second part will highlight conceptualization and theoretical foundations, followed by a discussion of research methods in the third part. The fourth part will present research findings and ensuing discussions, while the fifth part will encompass the conclusion, coupled with implications discussed in the “Implications”section. Finally, the last part will discuss limitations and propose avenues for future research.

    2. Conceptualization and Theoretical Background

    2.1. Central Bank Credibility

    Mishkin (2007) defines credibility as the degree of confidence that economic agents have in a central bank’s commitment to respect its monetary policy, especially in sustaining price stability. This confidence is essential because it affects economic behaviors.

    The issue of central bank credibility sparks lively debate in both the public and academic spheres regarding monetary policy. Citizens demand more credibility to ensure accountability from central banks, which enjoy increasing independence.

    Concurrently, a growing body of research examines the economic implications of greater transparency in monetary policy.

    As stated by Barro and Gordon (1983), to maintain economic stability central banks must establish clear rules for their monetary policy in order to strengthen their credibility.
    According to Goodhart et al. (1993), central bank independence refers more to their freedom to conduct monetary operations deemed necessary to achieve their statutory or externally imposed objectives. This idea was previously advanced by Aguir (2018), who argued that the effectiveness of this policy largely relies on the credibility, transparency, and independence of a central bank. This approach, coupled with transparency, is seen as the best means by which to ensure monetary policy credibility and currency value stability. In the specialized literature on monetary policy strategies, especially in developing countries like Tunisia, this reform is often recommended. Independence is presented as an alternative to the automatic application of rules such as those proposed by Fridman (1982), allowing the monetary authority to react more efficiently to unexpected crises without being overly constrained by predetermined objectives. Indeed, monetary policy operates in an environment where information acts an essential function in maintaining the power and autonomy of the central bank from external influences (Pollin & Riva, 2002).

    2.2. Exchange Rate Volatility

    Exchange rate volatility is a crucial phenomenon to consider in economic analysis, as it significantly influences the stability and performance of economies. This volatility can result from various factors, such as international capital flows, geopolitical events, monetary policies of major economies, as well as investors’ anticipations and perceptions. Sudden and significant fluctuations in the exchange rate can have major consequences for multinational businesses, affecting their production costs, revenues, and competitiveness in international markets. Moreover, excessive volatility can create an environment of uncertainty for investors, which can lead to a reduction in foreign direct investment and capital outflows, thereby affecting financial and macroeconomic stability. Economic and monetary authorities must therefore be attentive to managing this volatility, implementing appropriate policies and instruments to mitigate associated risks and maintain long-term economic stability. In this context, Kuncoro (2020) analyzed the impact of adopting an inflation-targeting framework on exchange rate volatility. His findings revealed that the inflation target set by monetary authorities primarily succeeded in stabilizing inflation but had only a limited impact on reducing exchange rate volatility. Additionally, it was found that adjustments in foreign exchange market interventions and interest rates did not necessarily guarantee exchange rate stability. Alternatively, Kilicarslan (2018) investigated the factors influencing the volatility of the Turkish lira against the US dollar. The results indicated that money supply, domestic investment, and trade openness tended to increase exchange rate volatility, while foreign direct investment, government spending, and production played a stabilizing role in volatility between the Turkish lira and the US dollar. Mirchandani (2013) analyzed the influence of macroeconomic variables, including interest rates, inflation, GDP, foreign direct investment, and the current account balance, on currency volatility. His study revealed a negative correlation between interest rates, inflation, and the current account balance and exchange rate volatility. Conversely, GDP and foreign direct investment were associated with greater stability of the national currency.

    2.3. Central Bank Credibility and Exchange Rate Volatility

    The emergence of academic literature on the analysis of the economic implications of increased central bank credibility and its impact on the success of monetary policy reflects a growing concern about exchange rate stability. Many studies have explored these aspects by focusing on detailed case studies or developing indices to evaluate the credibility of specific central banks;however, these approaches may have limitations as they often assume that five instances of more abundant or precise information automatically lead to greater transparency, without considering frictions related to information communication). This approach may not fully represent reality, as central banks may adopt innovative strategies to enhance their credibility, which are not always accounted for in standardized measures. Therefore, using standardized indices to assess central bank credibility can sometimes be questionable, as they may not capture all of the nuances and specific communication practices of each central bank. In this context, it becomes essential to examine how the perceived credibility of central banks can influence exchange rate volatility, taking into account the various strategies adopted by these institutions to build market confidence and maintain financial stability (van der Cruijsen et al., 2010). The argument by Engel et al. (2006) highlights the importance of exchange rate reactions in understanding a central bank’s monetary policy. Their analysis suggests that central bank communications on inflation rates strongly influence market expectations regarding future interest rate movements, and thus, by extension, a currency’s value in the foreign exchange markets. This market reaction underscores the emphasis a central bank places on its primary goal of price stability;however, market reactions are less pronounced when it comes to communication on the real economy or monetary aggregates, questioning the importance attributed to the “monetary pillar” in a central bank’s strategy. Furthermore, communications about expected exchange rate movements emerge as a crucial element, suggesting that a central bank has the ability to influence the national currency through its public statements. Thus, analyzing the correlation between central bank communications and market reactions provides valuable insights into how a central bank conducts its monetary policy and the underlying mechanisms that influence the exchange rate of the national currency.
    Indeed, according to Dornbusch (1976) the decisions of central banks influence the perceptions of economic agents, thereby affecting exchange rates. For this reason, a credible monetary policy can stabilize expectations and reduce volatility.

    2.4. Previous Bibliometric Studies on Central Bank Credibility and Exchange Rate Volatility

    While several studies have explored aspects related to this field, none have specifically delved into the linkage between central bank credibility and exchange rate volatility. For instance, Kapoor and Kar (2023) shed light on inflation expectations and perceptions, drawing from publications listed in the Scopus database from 1989 to 2021;however, they did not extensively discuss future research directions or key themes in this domain. Another study by Kapoor and Kar (2023) focused solely on the exchange rate, utilizing publications from the Scopus database between 1935 and 2020, but lacked a thorough examination of research themes or future research agendas. Similarly, Flores-Sosa et al. (2022) conducted a bibliometric analysis centered on the keyword “exchange rate volatility”, yet they did not elaborate on future research avenues. While our study addresses research themes and outlines a comprehensive future research agenda, it distinguishes itself by integrating the interplay between central bank credibility and exchange rate volatility. Thus, our approach differs by incorporating documents from both sources—Scopus and Web of Science—and proposing a novel fusion of keywords. Furthermore, some prior studies on this topic lack detailed future research agendas, underscoring the necessity for further exploration in this area.

    3. Methodology

    In this search analysis, we formulated our search parameters by combining the terms “central bank credibility” and “exchange rate volatility”. Initially, we conducted searches on the two foremost and reputable research databases: Web of Science (WoS) and Scopus. Table 1 displays the search query employed, which retrieved 169 articles from Scopus in BibTeX format and 1124 articles from WoS in plain text format.
    The approach utilized for conducting bibliometric and scientometric analyses involved the use of two separate tools: the Biblioshiny application, which is part of the bibliometrix 4.1.2 package in R (Aria & Cuccurullo, 2017), for performance analysis, and VOS viewer 1.6.17, for network visualization (Van Eck & Waltman, 2010). These methodologies have been widely applied in numerous previous review studies across diverse contexts, as evidenced by works such as that of Au-Yong-Oliveira et al. (2021).

    Biblioshiny was utilized for performance analysis, focusing on evaluating various metrics inherent to the academic field. This assessment encompassed research article quantities, reference occurrences, and collaboration trends to gauge the effect and sway of the analyzed papers. For instance, a topic chart, typically generated utilizing Bibliometrix, visually represented the thematic structure within a collection of scholarly works.

    Moreover, it highlighted clusters of related topics, emphasizing central themes and their interrelationships. In network visualization, VOS viewer was employed to create visual representations capturing the intricate relationships and collaborations among various entities within the scholarly domain. This tool facilitated the identification of clusters, trends, and significant connections, thus offering a comprehensive understanding of the structure and dynamics of the scholarly landscape.

    By combining Biblioshiny for effectiveness evaluation and VOS viewer for graph visualization, the technique made certain a comprehensive exploration of scholarly efforts. The input factors in this research include the total number of publications (NPs), total citations, the number of corresponding authors, and author productivity by country (Hendrix, 2008). The determinants encompass quantified measures, such as the h-index for sources and authors, as well as centrality and density indices computed for the topic chart.

    4. Results and Discussion

    4.1. Data Description

    Table 2 offers details concerning the database for the period from 1990 to 2024, including 1124 references from 352 origins, such as journals and books. The average age of the documents is 10.1 years, indicating that the majority of the documents are relatively recent. The table gives an overview of the document content, including 771 additional keywords (ID) and 1960 author keywords (DE) listed. These terms aid scholars in recognizing and also classifying the subjects addressed in the database. Furthermore, the database incorporates 1860 contributors, of which 373 wrote documents as single authors, suggesting that most documents result from collaborations among several writers. The table also offers an overview of collaborative authorship within the database. In particular, it suggests that 419 articles were written by a single author, while the remaining documents had an average of 1.19 co-authors per document. Furthermore, the database had a relatively high percentage (25.98%) of international co-authors, indicating the frequency of collaboration among different countries and regions within the database.

    4.2. Performance Analysis Published

    4.2.1. Document Evolution

    The Figure 1 represents the evolution of publications in the field of central bank credibility and exchange rate volatility from 1990 to 2024. The upright line portrays the number of publications, while the level axis represents the publication year. The chart illustrates nearly stable publications on credibility from 1990 to 1993, averaging about one article per year. From 1994 to 1995, there was a slight increase in publications, rising from one to four articles;however, the number of publications significantly increased over the period 2005–2023, ranging from 31 to 66 articles per year, reaching a peak in 2022 of 87 articles per year, indicating increased interest and research in this field. It is also noteworthy to observe a remarkable drop in publications after 2023. This could be attributed to political and economic instability in recent years (Figure 1).

    4.2.2. Source’s Impact

    • H-index: a measurement that indicates the impact of a journal’s publications based on the number of citations received by its articles.

    • TCs: the total number of citations received by the journal’s articles.

    • NPs: the number of published papers.

    • PY start: the year in which the journal’s publication started.

    In Table 3, we find the ranking of the top 10 journals according to performance measures. The h-index evaluates production and citations combined, indicating that a given author or source has published h articles, each of which has received h citations or more (Choudhri et al., 2015). As shown in the previous table, the Journal of Monetary Economics is ranked first in terms of both the h-index and the g-index, due to a relatively high number of publications and significant citations. The Journal of Business Research occupies the second place in terms of the h-index, highlighting its importance in the field of central bank credibility and exchange rate volatility. The Economics Journal and Economics Letters journals display the lowest h-index values, with a common value of 8.

    4.2.3. Authors Impact

    Table 4 provides an overview of authors of research on central bank credibility and exchange rate volatility based on their h-index, total citation count, number of publications, and starting years. The h-index and total citation count indicate the authors’ research impact and influence, while the number of publications and starting years provide insights into their productivity and tenure in the field. Castelnuovo et al. (2008) have an h-index of 5, indicating that he has published at least five papers that have received at least seven citations each. His total citation count is 130, suggesting that other scholars in the field have cited his research multiple times. With six publications starting in 2008, he has been actively contributing to the field of central bank credibility and exchange rate volatility in recent years. Svensson (1997), with an h-index of 4 and the highest total citation count of 1127, has received substantial recognition and influence within the field. Having published five papers starting in 1997, he has been actively engaged in scholarly work for a relatively long time. Swanson and Williams (2014) While Gupta and Michell (1997) and Masciandaro (2007) have fewer publications (five) and lower total citation counts (39 and 31, respectively), Siklos (2015) has published nine articles with a total citation count of 71. Sousa (2010) has h-indices of 4, which is still respectable and reflects moderate research impact. With four publications, his total citation counts is 200. His research has contributed to the knowledge base of central bank credibility and exchange rate volatility since 2010. With an h-index of 4, Hayo et al.’s (2012) research has garnered moderate attention and impact in the field. His work has expanded since 2012 with four publications, allowing for deeper insights and contributions.

    4.2.4. Most Locally Cited Documents

    Examining the most cited documents allows this article to pinpoint the most influential and impactful publications within a particular field of study. Through the analysis of citation patterns and the prevalence of specific documents in the Table 5, researchers can glean insights into the foundational works that have influenced the evolution and discussion of literature concerning central bank credibility and exchange rate volatility.

    This study examined inflation targeting, which essentially involves targeting inflation forecasts: the central bank’s inflation forecasts then become a clear interim goal. Targeting rising prices forecasts streamlines both implementing and monitoring monetary policy. Balancing the weighting of results decides how rapidly inflation forecasts are adjusted towards the inflation target. Compared to inflation targeting, targeting money growth or exchange rates is generally less effective and leads to greater inflation variability. Commitment to “targeting rules” may be preferable to commitment to “instrument rules”.

    This document analyzes the implementation of inflation targeting in a small open economy, taking into account both total supply and demand with a microeconomic basis, as well as practical stylized delays in the various channels of the transmission of monetary policy. It also compares strict and flexible targeting of CPI and domestic inflation, as well as reactions to inflation targeting and the Taylor rule. Flexible CPI inflation targeting affects not only the variability in CPI inflation but also that of the output gap and the real exchange rate. Negative productivity supply shocks and positive demand shocks have similar effects on inflation and the output gap, leading to similar monetary policy responses.

    This paper uses a principal–agent framework to determine how a central banker’s incentives should be structured to promote an optimal policy on a societal level. Unlike previous findings based on ad hoc targeting rules, the inflationary bias of discretionary policy is eliminated, and an optimal response to shocks is achieved through an optimal incentive contract, even when a central bank has private information. In the one-period model, which has been the basis for much of the literature on discretionary monetary policy, it is demonstrated that the optimal contract ties the rewards of a central banker to realized inflation.

    This article examines how changes in monetary policy affect stock prices, with the aim of measuring the average reaction of the stock market and understanding the economic reasons behind this reaction. It is observed that, on average, a hypothetical unanticipated 25-basis-point decrease in the federal funds rate target is associated with about a 1% increase in broad stock indexes. Using a methodology developed by Campbell and Ammer, it was found that the effects of unanticipated monetary actions on expected excess returns account for the largest part of the stock price reaction.

    This article seeks to determine whether there is information asymmetry between the Federal Reserve and the public by analyzing the inflation forecasts of the Federal Reserve compared to those of commercial forecasters. It highlights that the Federal Reserve possesses significant information about inflation beyond what is available to commercial forecasters. Additionally, it demonstrates that monetary policy actions send signals about the information held by the Federal Reserve, leading commercial forecasters to adjust their forecasts accordingly. These findings can help understand why long-term interest rates tend to increase in response to tighter monetary policies.

    The research examines models of the separation or combination of banking regulation and monetary policy functions in different countries. It emphasizes that no model clearly has the advantage, with arguments in favor of each approach. The question of regulatory design depends on the financial structure of each country. The article argues that combining functions can help prevent systemic crises, but central banks are moving away from this primary role due to structural changes in the banking system. Regulation tends to shift under the control of independent bodies, although central banks continue to play a crucial role as a source of last-resort liquidity.

    4.2.5. Conceptual Structure

    The theoretical framework involves the examination of the tag cloud (Figure 2), the term co-occurrence graph (Figure 3), and the thematic graph (Figure 4).

    The authors’ keyword cloud highlights that the core subject tackled by the bulk of scholars is monetary policy and then inflation targeting, which ranks second in sequence in the articles. Additionally, the Taylor rule and banking supervision are closely linked to central bank credibility and exchange rate volatility.

    The previous figure illustrates the formation of six distinct clusters. Cluster 0 is centered on the topic of monetary policy, specifically focusing on issues related to inflation targeting and price stability. Cluster 1 is dominated by the theme of transmission, which also links to Cluster 2 through the concept of credibility. Cluster 3 is primarily concerned with governance, encompassing topics related to performance, management, and authority. Cluster 4 revolves around the European Central Bank (ECB) and its responses. Finally, Cluster 5 is focused on key lessons learned. In Figure 4, we have a cartographic representation of themes, arranged on a plane with the centrality axis on the abscissa and the density axis ordinate. By analyzing this graph, we will be able to identify the main subject, the fundamental or cross-sectional topic, the new or disappearing topics, and the niche themes.
    The primary themes are situated in the top-right quadrant, distinguished by their high density and centrality. A focal point within this cluster is the concept of transmissions, alongside interest rates and credit. These topics are pertinent to banking supervision and are subject to analysis across international borders and within the euro area. The pivotal document within this cluster is authored by Boudriga et al. (2009).
    Conversely, fundamental or overarching themes are located in the bottom-right quadrant. These topics exhibit low density but high centrality. This clump encompasses discussions on monetary policy, in conjunction with inflation and modeling. It pertains to a dynamic pricing model premised on the gradual dissemination of information within the populace. In contrast to traditional rigid pricing models, this approach emphasizes three characteristics that align more closely with widely accepted views on the influence of monetary policy;.the central document in this cluster is authored by Mankiw and Reis (2002). Another significant cluster in this quadrant concerns discretion, which intersects with discussions on information and credibility, particularly in the context of reforming banking supervision, predominantly examined within the European Parliament. The key document within this cluster is authored by Boyer and Ponce (2012).
    In the bottom-left quadrant, emerging concepts are delineated, depicted by peripherality and frequency. This clump revolves around the theme of lessons, alongside considerations of committees and dissemination. These topics are applied to the analysis of central banking practices, primarily scrutinized within the United Kingdom, Germany, and Italy. The evaluation of these issues primarily involves structured and meticulous comparisons, with the central document authored by Quaglia et al. (2008).

    The niche themes concern the ECB, coexisting with responses. The next grouping deals with the theme of governance, and is linked with power.

    5. Conclusions

    Through this review, we conducted a comprehensive bibliometric and scientometric analysis focusing on research on central bank credibility and exchange rate volatility. This analysis allowed us to highlight key trends and the structure of knowledge, both intellectually and conceptually. This survey analysis enriches the prevalent understanding by shedding light on the growing improvements in academic inquiry at the convergence of central bank transparency and exchange rate volatility. We identified the most productive institutions and individuals in this field, as well as the most cited studies. Additionally, we are able too btain a brief over view of the core problems in this field, which could guide researchers interested in this intersection. We examined the emergence of central bank credibility and exchange rate volatility, as well as the impact of monetary policy transparency and inflation targeting as fundamental issues in the context of central bank credibility. As a result, we have proposed various theoretical and functional outcomes, particularly regarding the constraints of this subject area, thus identifying prospective paths of anticipated inquiry programs.

    6. Implications

    In accordance with Aguinis et al. (2020), and using the obtained results, we effectively integrated theory and policies into a cohesive agenda, providing both theoretical and policy perspectives. Due to advances in online channels, efficient linkages, and technological resources, investigations into the correlation between central bank credibility and exchange rate volatility have seen significant growth in recent years. This trend highlights the need for the comprehensive mapping and evaluation of studies focused on central bank transparency and exchange rate volatility. Numerous investigations have explored this area, including the interplay between central bank independence and transparency, as well as the relationship between banking reputation and exchange rates, as well as volatility (Flores-Sosa et al., 2022).

    However, bibliometric abstracts and comprehensive assessments of literature on central bank credibility and exchange rate volatility have received little attention. Thus, through the analysis of 1124 academic research articles combining the concepts of central bank transparency and exchange rate volatility, this article contributes to the literature by dynamically mapping central bank credibility and exchange rate volatility and applying a bibliometric study;that is to say, this study has enriched the understanding of the present corpus by accentuating the growing progressions in scientific research on central bank transparency and exchange rate volatility. In doing so, we identified the main sources of publication, reference networks, leading studies, and the highly prolific scholars in this area, thus summarizing the main topics of discussion that can serve as a pathway for upcoming inquiries on central bank credibility and exchange rate volatility. To understand the interval linking central bank transparency and exchange rate volatility, research must analyze multiple inter-graded investigations and intentionally distinguish the channels of central bank credibility transmission to influence exchange rate volatility. Concerning this issue, the key elements associated with central bank credibility and exchange rate volatility have been emphasized: transparency of monetary policy, inflation targeting, and governance.

    Moreover, this bibliometric review of the literature on central bank credibility and exchange rate volatility offers several practical implications for policymakers and central bank governors. Governors should leverage the benefits of transparency, particularly by harnessing commercial interactions supported by information and communication technologies.

    7. Research Limitations and Future Directions

    This research review, despite its significant contributions both theoretically and practically, has certain limitations, as is often the case in research studies;.however, these limitations also pave the way for significant opportunities to guide future research. For example, while this article relied on documents from the WoS and Scopus databases, it would be beneficial for future studies to consider other sources, such as Science Direct, Google Scholar, IEEE Xplore, or PubMed. This would provide a more comprehensive perspective and additional information on the current research theme. Additionally, this study was limited to documents in English, whereas the inclusion of publications in other languages could enrich our understanding of the field. Future research could also deepen the findings of this study by examining the study approaches and statistical methods used in the field of central bank credibility and exchange rate volatility. Furthermore, it is essential for future studies to adopt effective research methods and rigorous analysis procedures, tailored to the diversity of disciplines and contexts in the field of central bank credibility and exchange rate volatility.

    7.1. Cluster 1: Monetary Policy and Independence

    A prospective analysis is recommended to explore several key areas related to the intersection of central banking and supervisory responsibilities. First, it is important to investigate how the loss of bank supervisory responsibilities by central banks might impact the conduct and effectiveness of monetary policy. Furthermore, analyzing how confidential bank supervisory information enhances the accuracy of macroeconomic forecasting by central bank staff, and how it influences monetary policy decisions, is crucial. Additionally, examining the extent to which members of the Federal Open Market Committee (FOMC) utilize this confidential information in shaping monetary policy, and the implications for policy effectiveness, should be a focus. The analysis should also assess the complementarity between bank supervisory duties and monetary policy in achieving central bank objectives, exploring the potential consequences for the central bank’s organizational structure. Finally, potential reforms or adjustments to central bank structures should be explored to better integrate supervisory responsibilities with monetary policy mandates, ultimately aiming for improved policy outcomes.

    7.2. Cluster 2: Monetary Policy and Exchange Rate Framework

    A predictive evaluation is advised to delve into several critical aspects of inflation targeting in small open economies, particularly those with forward-looking aggregate supply and demand. First, it should further examine the implications of inflation targeting while considering additional factors like exchange rate dynamics, international trade, and capital flows. Furthermore, investigating the effectiveness of various inflation-targeting strategies such as strict versus flexible targeting of different inflation measures, including the Consumer Price Index (CPI) and domestic inflation, is essential for understanding their roles in achieving macroeconomic stability and promoting economic growth. The analysis should also explore the optimal design of inflation-targeting reaction functions and Taylor rules in response to different economic shocks, weighing the trade-offs between stabilizing inflation, addressing the output gap, and maintaining exchange rate stability. Additionally, it is important to assess the transmission channels of monetary policy in these economies, particularly the roles of financial intermediaries, asset prices, and expectations formation in influencing inflation and output dynamics. Finally, the analysis should examine the implications of asymmetric shocks, such as negative productivity supply shocks and positive demand shocks, on inflation dynamics and output fluctuations, evaluating how effectively monetary policy responses can mitigate the adverse effects of these shocks.

    7.3. Cluster 3: Monopolistic Competition andMonetary Policy

    Future studies are recommended to investigate several crucial aspects related to the zero lower bound on nominal interest rates and their implications for monetary policy effectiveness and macroeconomic stability, especially in contexts where average inflation is very low. Researchers should examine how various monetary policy feedback rules such as interest rate targeting versus inflation targeting affect the severity of real distortions that arise from the zero lower bound. Additionally, it is important to explore the role of price-setting behavior in shaping the impact of the zero lower bound on the real economy, taking into account factors like forward-looking versus backward-looking price-setting mechanisms and the degree of price level persistence. Assessing the effectiveness of alternative policy measures, including unconventional monetary policies (such as forward guidance and quantitative easing) and fiscal policy interventions, will also be essential in mitigating the adverse effects of the zero lower bound on economic activity and inflation dynamics. Finally, future studies should investigate the interactions between monetary policy, price-setting behavior, and macroeconomic outcomes in various economic environments, including periods characterized by low inflation, deflationary pressures, or economic downturns.

    7.4. Cluster 4: Monetary Policy and Models

    Prospective analyses are suggested to further investigate the implications of the zero lower bound on the effectiveness of monetary policy and the efficacy of fiscal policy, emphasizing the importance of considering the entire path of expected future short-term interest rates rather than just the current rate. Additionally, it is essential to examine how different measures of the zero lower bound’s effects on yields of various maturities can provide insights into the transmission mechanisms of monetary and fiscal policies across different time horizons. Researchers should explore the factors driving the dynamics of longer-term yields during periods of near-zero short-term interest rates, including the roles of market expectations, risk premia, and unconventional monetary policy measures. Furthermore, assessing the timing and magnitude of the transition from relatively unconstrained longer-term yields to more constrained yields will be crucial in understanding the implications for the effectiveness of monetary and fiscal policies in stimulating economic activity and achieving price stability. Finally, it is important to investigate how variations in the degree of yield constraint across different time periods and economic environments affect the optimal policy responses of central banks and fiscal authorities, along with their implications for macroeconomic outcomes.



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    Wejden Ben Jannet www.mdpi.com

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