Hi Emmanuel. I have some job experience in a Inflation-targeter central bank. I can thus say that inflation rate TARGET do not change on a monthly basis, not even on a yearly basis. Under some circunstances, the target can be fixed at 4 percent, say, and stay in such a value for 25 years! This should be the reason the referee has those adverse opinions on the topic. Therefore, I advise to change the topic towards examining shocks to the observed inflation rate. Then you can for instance argue about monetary policy reaction to supply-side shocks as well as to demand-side shocks to the inflation rate. Then both SVAR and DSGE models are appropriate for the question. Data issues should be acknowledged, but cannot deter the research on this new topic. Best regards. Carlos

Thanks, Carlos. Yes, you are right; the target does not change every month. The model, though, is a quarterly model, and the target changed quite a bit for some time after we adopted the IT framework. Currently, the target is 8%. But I get your point, even at a quarterly frequency, the target is not that volatile.

In the SVAR model, I make the inflation target purely exogenous, and if I shock it, it has almost a one-to-one effect on the inflation rate. I can drop the target and consider shocks to the inflation rate itself as disinflation shocks. But I guess it would not change the results that much regarding the effect of a disinflationary shock on Ghana's output and interest rate. Others identify disinflationary shocks as shocks to the nominal interest rate, but I don't want to go that road. I was trying to identify disinflationary shocks as shocks to the inflation target itself. But I guess I would stick to identifying it as a shock to the inflation rate as some do.

Anyway, that was not the concern of the referee. Here is my research. Some authors have suggested that Ghana's central bank should raise the target because the inflation rate has deviated from the target over many years. But the papers do not consider the effect of doing that on the economy. My paper argues that the central bank should not raise it as the sacrifice ratio is almost zero in Ghana's case (from the SVAR), and prices are not that sticky in my estimated DSGE model for Ghana's economy. As a result, if you raise the target, the inflation rate and nominal interest rate will jump almost immediately, and output will fall. Anyway, the referee says it is obvious that Ghana's central bank should not raise the target. I guess he has already agreed to my argument, but, yeah, it is a debate I am trying to contribute to. Then, on secondary matters, he says 58 observations are insufficient for SVAR and DSGE. I have seen top researchers at top schools like Martin Uribe, and Stephanie Grohe even use 32 samples for a 6-variable SVAR. Maybe, on data issues in Macro, it depends on the referee.

Hi Emmanuel. Yes, you got some interesting points, no doubt Ghana experience on changing the target should be studied. However, the key point to remmember on this matter is that the majority of inflation-targeter central banks around the world DO NOT consider that monetary policy is related to changing the inflation target, and this is because it is a signal for the economic agents about the long-run inflation. This implies it should not be moved at all. And this is a matter that is already present in the engineering's point of view behind control theory: they would understand that the inflation target is a fixed target. Having said that, it makes all the sense to change the inflation forecasts, which can be considered a short-term signal to the economic agents. In fact, the experience of many inflation-targeter central banks considers an initial period during which the stabilization of the whole economy, including variables like the exchange rate, the inflation rate, the public sector's primary balance, the foreign direct investment, etc., are taking reasonable values. During this period, those central banks usually avoid using an inflation target as such, they used inflation forecasts, instead. You should understand that, during such a period, central banks know economic agents are changing their short-run biased view towards a more stable long-run view. therefore, in order to build credibility, central banks usually will use those inflation forecasts as signals. Once stabilization reaches some clear success and observed inflation is becoming a one-digit inflation rate (near international levels of less than 6 per cent per year), THEN central banks will be willing to establish an inflation target of 3 percent a year, which they will not change at least for 10 years. Then you can understand that Ghana's experience may be addressed as a special case, but not quite on the positive sense. Therefore, as a scholar, I would address this topic from a very critical perspective, trying to document the reasons Ghana's policymakers were using inflation targets as if they were using inflation forecasts. I would not be able to do so without comparing Ghana's experience with other relevant experiences around the world.

Thanks, Carlos, for the comment. Yes, the reason why policymakers were changing the target the way they did would be an interesting study. Whatever the reason, it seems it played a role in the dynamics of the inflation rate. Maybe I would investigate it someday when I have access to that information. For now, some papers argue that Ghana's central bank should raise the target to improve credibility. But the methods they use are not dynamic models, so they do not talk about how increasing the target would affect Ghana's economy. So that is my investigation. And since there seems to be some sort of variability in the announced target, I thought of investigating a shock to the target affects the economy.

Anyway, I found this paper, "The long-run relationship between inflation and output in postwar economies" that investigates a permanent shock to the inflation rate on output. So a disinflationary shock here is a shock to the inflation rate (not the target) along with some long-run restrictions. Using that strategy does not change my main message, though, that the central bank should not raise the target (contrary to what others have said). But was surprised to see they used 25 observations (annual data for 25 years), and looking at the number of citations, the paper seems quite popular. And then a referee complains about my 58 observations...:). What argument can I make here about data length being ok? Your thoughts?

You know, Emmanuel, sometimes referees complain too much and one can only be diplomatic. From my point of view, any relevant question should be addressed, but always following the correct academic arguments and maintaining objectivity and rigor. If there are just 58 annual observations, then take one year to finish the research and send it with 59 observations. It may take a while for the last version to be published and maybe you can get it done with 60 observations! Not too bad.

Yes, you can use SVAR (Structural Vector Autoregression) and DSGE (Dynamic Stochastic General Equilibrium) models to examine shocks to the inflation rate target. SVAR models are used to identify the effects of structural shocks on macroeconomic variables. DSGE models are used to study the effects of various economic shocks on the economy.