Gagik G. Aghajanyan

Bio: Gagik G. Aghajanyan is an academic researcher. The author has contributed to research in topics: Monetary policy & Real interest rate. The author has an hindex of 1, co-authored 1 publications receiving 4 citations.

Core inflation in a small transition country: choice of optimal measures

Abstract: Several non-monetary (mainly supply) factors affect prices in the short-run. It is widely acknowledged that in countries (especially countries in transition), where the price level is highly volatile and seasonal, it is not expedient for central banks to use official inflation index while formulating monetary policy. For this reason, it is crucial for central banks to work out, study and follow the behavior of core inflation that enables to reflect long-run price movements. This paper presents the application of various methods of calculating core inflation to Armenian data (for 1996:1-2002:12). Each measure is calculated at monthly frequencies and evaluated by different criteria. The analysis shows that core inflation indices, calculated by trimming the distribution of prices at 10 or 15%, are the best and most effective indicators for monetary policy-makers in Armenia, since they capture inflation trends and are closely tied to monetary aggregates. However, the median seems to be the best predictor for forecasting inflation of all core inflation measures discussed in this paper. JEL Classification: P2, P3, E31, R5 Keywords: inflation, transition country, Armenia (ProQuest Information and Learning: ... denotes formulae omitted.) 1. Introduction Ever since the middle of the last century, the central banks started to play a key role in the process of the aggregate demand management. In that context, they tried to manage economic growth, unemployment, wages etc. Only after the breakdown of the Bretton-Woods monetary system the central banks' key role was realized mainly through the maintenance of the price stability. In line with the development of financial and capital markets the concept of the price stability was also developed and the idea of direct inflation targeting became widespread. This is because the maintenance of price stability creates conditions for households and businesses to formulate healthy expectations on price movements and make right decisions on consumption and investments. Since 1996 the law "On the Central Bank of the Republic of Armenia" made the maintenance of price stability the main goal of the Central Bank of the Republic of Armenia (CBA). In the annual monetary policy program CBA announces the appropriate annual rate of inflation, and describes the main policy measures needed for keeping the inflation within the determined level. However, these developments brought many difficulties and raised peculiarities that central banks need to explain when they accept inflation targeting as a monetary strategy. The latter refers to such issues as which price indices to choose, how to define them, how to communicate with the public regarding the chosen goal and how to explain deviations from it without confusing it. Inflation targets were orignally expressed in terms of the rate of change or the level of the consumer price index. The consumer price index (CPI) is a weighted average index, representing movements of overall price level, i.e., cost of consumer basket of goods and services, which is measured by the National Statistical Service of the Republic of Armenia (NSS). CPI is highly volatile, due to the seasonality of the production of some goods and services such as agricultural products, and tourism, and to annual cycles of consumer expenditures. The CPI can be treated as a least variance estimator of economy-wide price changes only if the price change distribution is normal (see, e.g. Rae, 1993, Ball and Mankiw, 1995, Jaramillo, 1997). If the target of monetary authorities is to maintain price stability in the economy, they ought to be able to distinguish between temporary shocks to the price level and a persistent drift of prices. Different shocks like seasonality, crop failures or other short-term fluctuations are beyond the control of monetary authorities. Therefore, central banks should disregard various one-off shocks coming from the supply side and govern or control long-term movements in prices that reflect aggregate demand. …

Is economic convergence in new member states sufficient for an adoption of the Euro

Abstract: 1. Introduction Ten countries have joined the European Union (EU) on May 1st, 2004: Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Estonia, Latvia, Lithuania, Cyprus and Malta. Bulgaria and Romania also joined the EU in January 2007. These New Member States (NMS) are expected to enter the "Third Phase" of the European Monetary Union (EMU), thus adopting the euro, as soon as they fulfil the Maastricht criteria, that is to say when their economy has reached a level of convergence which makes it possible for them to abandon the monetary instrument. At the same time, by trying to fulfil the fiscal criteria, they also decide to give up part of the fiscal instrument; indeed, after adoption of the European single currency, the use of fiscal policy will still be constrained by the Growth and Stability Pact; besides, the applicants are invited to join the Exchange Rate Mechanism (ERM2) of the European Monetary System (EMS), during at least two years without any devaluation, when they are ready to do so. Moreover, real convergence is necessary: the NMS' economies should have converged towards the Euro(pean) business cycle; but we first need to assess the existence of a business cycle which would be specific to the euro area. According to the Optimal Currency Area (OCA) theory, which was first designed by Mundell (1961), Mac Kinnon (1963) and Kenen (1969), these countries are more suited to belong to a monetary union in so far as they fulfil criteria such as a high degree of external openness, mobility of factors of production, and diversification of production structures. In this paper, we shall see where the 2004-NMS that have not adopted the euro yet stand in terms of meeting or not the Maastricht criteria; then we will try to find out whether these NMS fulfil the criteria which have been identified by the OCA theory and which are more linked to the real convergence of an economy. The OCA theory is thus used to assess the macroeconomic costs associated with a participation of the new European countries in the European Monetary Union. Then, after having gone through a survey of the literature devoted to business cycles synchronisation, we will seek to determine if there is a clear correlation between those countries' business cycles and the European cycle, which would stand in favour of an early adoption of the euro in these countries. Further questions appear such as: among the new European members, have the ones that have already joined the ERM2 converged more quickly? Slovenia joined the euro area in January 2007, so did Cyprus and Malta one year later, because they fulfilled all the Maastricht criteria except for the public debt (which has decreased steadily in both countries, and is now below or close to the reference value of 60%); but, for other countries that have joined ERM2, is the non-fulfilment of a single criterion sufficient to postpone the accession to the euro area, as it was the case for Lithuania and Estonia? Given that, for old member states, the achievement of some criteria had been interpreted as a tendency, this would tend to indicate that the European institutions do not wish to let the new comers join the euro area too quickly. All these questions are in fact related to the problem linked to nominal and real economic convergence in the NMS: has the latter sufficiently increased lately for an early adoption of the euro in those countries? We shall see that two groups of countries emerge, according to the OCA theory: one group which is ready to join the club, and the other one which includes countries for which it is not yet the best solution. 2. The NMS and the Maastricht criteria: has nominal convergence been achieved? Central and Eastern European Countries (CEECs) have chosen a rather rigid currency policy at the beginning of the transition period in order to fight inflation, but they have gradually privileged a more flexible exchange rate system, because of a worsening of their current accounts (due to the appreciation of their real exchange rate) (1). …

Comparing the measures of core inflation in India: trimmed mean and structural vector auto–regression approach

Abstract: This paper estimates core inflation through trimmed mean method and structural vector auto-regression (SVAR) method by using monthly data of wholesale price index (WPI) and index of industrial production (IIP) from April 2005 to March 2014 for India. In this paper, we have compared 25% trimmed mean and SVAR method and it was found that SVAR measure provides better results than trimmed mean method. In SVAR method, we found the exact movements of core and non-core shocks in impulse response functions and variance decomposition. It is based on the definitions of core inflation but trimmed mean method excludes the outliers in the price index, whereas SVAR method is difficult to estimate.

Trendanalysen mit Mann-Kendall-Test und Theil-Schätzer

Abstract: Es wird eine Erweiterung fur Trendanalysen mit dem Mann-Kendall-Test und der linearen Regression nach Theil vorgestellt, die eine Gewichtung der zu analysierenden Daten ermoglicht. An Hand eines erdachten Beispiels wird die Auswirkung der Gewichtung auf die Ergebnisse des Mann-Kendall-Tests und der Regression nach Theil demonstriert. Die Gewichtungsfaktoren leiten sich dabei von den Stichprobenumfangen ab, auf die sich aggregierte Daten oder Mischproben grunden. Ein Wert, der die Information von mehr Individuen reprasentiert, soll starkere Beachtung finden als ein Wert, der auf weniger Individuen zuruckgeht. Die Erweiterung wirkt sich auf die Ergebnisse der Theil-Regression aus. Unter Gewichtung neigt sich die Ausgleichsgerade starker den Datenpunkten mit groseren Stichproben zu. Die Umsetzung der vorgeschlagenen Erweiterungen zur Trendanalyse mit dem Mann-Kendall-Test und der Regression nach Theil (Berucksichtigung von Messunsicherheiten und Gewichtung der Daten) steht in der Praxis noch aus.