Inflation targeting policy in Papua New Guinea: an econometric model analysis

Abstract

Papua New Guinea has not explicitly endorsed inflation targeting (IT) policy but it continues to pursue a policy framework that enables maintenance of low and stable inflation. A simple econometric model of inflation in Papua New Guinea is developed and analysed to identify the appropriate policy option to manage inflation. The model provides the basic structure to study the determinants and process of inflation and to analyse how inflation responds to macroeconomic movements in the economy. Based on the analysis, it is concluded that in the medium term, Papua New Guinea should probably continue to rely on a simpler and less demanding monetary policy framework than venturing into IT policy.