Toward an Inflation Targeting Policy in Morocco: Analysis of Key Macroeconomic Aggregates through the Hodrick-Prescott Filter

Revue Internationale de la Recherche Scientifique (Revue-IRS) ISSN: 2958-8413 Vol. 3, No. 6, Novembre 2025 This is an open access article under the CC BY-NC-ND license. http://www.revue-irs.com 6427 Toward an Inflation Targeting Policy in Morocco: Analysis of Key Macroeconomic Aggregates through the Hodrick-Prescott Filter Imane SAAD-ALLAH Doctor in Economics and Management Sciences Ibn Zohr University Morocco Abstract: Morocco has expressed its intention to adopt an inflation-targeting (IT) monetary framework, addressing the limits of traditional approaches based on monetary aggregates or fixed exchange rates. International evidence shows that IT enhances price stability, credibility, and transparency. Successful implementation requires solid macroeconomic foundations and institutional readiness. This study examines Morocco’s main aggregates using the HodrickPrescott filter to separate long-term trends from short-term cycles. By identifying structural growth and cyclical fluctuations, the analysis highlights periods of stable expansion and controlled inflation, providing insights into the country’s preparedness for IT and emphasizing the role of macroeconomic stability as a prerequisite for an effective inflationtargeting policy. Keywords : Moroccan economy, Hodrick-Prescott filter, Economic cycles, Long-term trends, Cyclical components Digital Object Identifier (DOI): https://doi.org/10.5281/zenodo.17625037 Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6428 1. Introduction Morocco has expressed its intention to adopt an inflation-targeting (IT) monetary framework. This policy emerged as a response to the limitations of traditional approaches based on controlling monetary aggregates and maintaining fixed exchange rate regimes. International experience has demonstrated its effectiveness in achieving price stability and anchoring inflation expectations (Neumann, 1997). Countries that have successfully implemented inflation targeting, such as New Zealand, Canada, and the United Kingdom, have benefited from greater transparency, credibility, and monetary discipline. In emerging economies, including Morocco, the shift toward such a regime represents not only a change in monetary strategy but also a structural transition requiring a sound macroeconomic foundation (Imane, 2023). The effectiveness of inflation targeting depends heavily on the initial economic environment and institutional readiness. Therefore, before implementing such a policy, it is essential to assess whether the country meets the necessary macroeconomic and structural preconditions that support its success. However, Morocco faces challenges in successfully implementing an inflation targeting policy (Imane, 2025). In this context, the present paper aims to analyze the main macroeconomic aggregates of the Moroccan economy particularly inflation and GDP over the past decade, in order to evaluate the country’s readiness to adopt an inflation-targeting framework. By applying the HodrickPrescott filter, the study decomposes these variables into their long-term trends and short-term cyclical components, providing insights into Morocco’s structural stability and cyclical behavior. This paper presents an analysis of Morocco’s main macroeconomic variables using the Hodrick-Prescott filter. This econometric method makes it possible to distinguish long-term trends from short-term cyclical components within time series. The adoption of this approach is motivated by the need to better understand the structural and cyclical dynamics of the Moroccan economy, by differentiating sustained growth phases from temporary fluctuations. Applying the filter thus highlights underlying trends while capturing economic cycles, thereby providing a more accurate interpretation of the evolution of key aggregates such as GDP, inflation, and the exchange rate. In this context, the paper is structured into two complementary subsections. Section 1 focuses on the presentation of the trend components of macroeconomic aggregates, providing an overview of the long-term trajectories of the variables under study. This section details the methodology used for data processing, explaining the selection of the Hodrick-Prescott filter Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6429 parameters and the interpretation of the results obtained. The objective is to identify structural trends that reflect long-term economic transformations, while highlighting their implications for Morocco’s economic growth, inflation, and external competitiveness. The second section then examines the cyclical components of macroeconomic aggregates, corresponding to temporary deviations around the long-term trends. This section analyzes economic cycles by identifying phases of expansion and recession, as well as their interaction with economic policies and exogenous shocks. 2. Literature review The economic crises that have affected several countries such as East Asia in 1997, Russia in 1998, Brazil in 1999, and Argentina in 2002 have often been attributed to the rigidity of their exchange rate regimes. This type of peg, by limiting monetary flexibility, encourages significant capital movements and increases the risk of currency depreciation, which has led many countries to turn away from it. It is in this context that the inflation targeting policy emerged, designed to compensate for the ineffectiveness of traditional approaches based on the control of monetary aggregates and the fixing of the exchange rate. International experience has demonstrated its effectiveness (Neumann, 1997). However, its success depends on the prior existence of a flexible exchange rate regime, a condition put forward by several research (Masson et al., 1997). The exchange rate thus appears as a major determinant of price stability and the effectiveness of this monetary framework, both in Keynesian and monetarist models and in the empirical experiences of countries that have adopted it. Inflation targeting differs from previous regimes by explicitly targeting an optimal inflation rate for the entire economy. Exchange rate flexibility allows the central bank to strengthen its independence, broaden its objectives, and improve its responsiveness. This flexibility becomes essential when the central bank faces a trade-off between stabilizing the exchange rate and controlling inflation. In such cases, the accumulation of conflicting objectives can erode the credibility of monetary policy and compromise the anchoring of expectations. The literature on inflation targeting highlights two major macroeconomic conditions as prerequisites for establishing a credible monetary regime: initially low inflation and stable, responsive economic growth. Regarding low initial inflation, the International Monetary Fund’s Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6430 paper “Establishing Initial Conditions in Support of Inflation Targeting” emphasizes that a country “experiencing annual inflation rates of 15–25% for several years will be unable to rely solely on monetary policy to sustainably reduce inflation.” Operating in an environment where inflation is already under control facilitates the anchoring of expectations, strengthens the credibility of the central bank, and reduces the transition costs toward an inflation targeting framework. Similarly, recent research on 35 emerging economies by Romdhane et al. (2023) finds that the adoption of an inflation-targeting (IT) regime requires economies to exhibit robust macrofinancial fundamentals from the outset, particularly contained inflation and institutional stability. As for stable economic growth, it emerges as an equally essential foundation. Moderate, predictable growth and a non-extreme output gap allow the central bank to adjust its policy stance without constantly facing severe cyclical fluctuations that could undermine inflation anchoring. The study by Kuncoro et al. (2024) on Indonesia shows that an inflation-targeting framework is more effective when growth is less volatile and inflation is already low suggesting that an economy’s responsiveness and resilience improve the feasibility of IT implementation. In other words, initially low inflation and stable growth work hand in hand: the former anchors expectations, while the latter ensures that the macroeconomic trajectory allows monetary policy to operate without persistent constraints from imbalances. For a country like Morocco, analyzing the evolution of inflation and growth through key macroeconomic aggregates is thus essential to assess its readiness for the adoption of an inflation-targeting monetary regime. 3. Methodology The analysis of the trend components of Morocco’s macroeconomic aggregates relies on the use of the Hodrick-Prescott (HP) filter, an econometric method widely applied to decompose time series into two distinct elements: a long-term trend and a short-term cyclical component (Sakarya & de Jong, 2020). The choice of this filter for examining Moroccan economic aggregates is justified by its ability to isolate fluctuations in economic growth, inflation, and other key macroeconomic variables. This approach makes it possible to highlight the structural trends underlying the long-term evolution of the national economy. Such decomposition is Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6431 essential for analyzing the determinants of potential growth, identifying structural shocks, and assessing the long-term impact of economic policies. The Hodrick–Prescott filter is based on an optimization function that minimizes the sum of squared deviations between the observed values of a time series and its trend component, while simultaneously penalizing excessive fluctuations in the latter. In practical terms, it aims to determine a trend series that minimizes the following objective function : ∑ 𝑇 𝑡=1 (𝑌𝑡−𝑇𝑡)2+𝜆∑ 𝑇−1 𝑡=2 [(𝑇𝑡+1 −𝑇𝑡)−(𝑇𝑡−𝑇𝑡−1)]2 (01) Where 𝑌𝑡 represents the observed value of the economic aggregate at time t, 𝑇𝑡 is the estimated trend component, and 𝜆 is the smoothing parameter that controls the flexibility of the trend. The application of the Hodrick–Prescott (HP) filter in this study allows the decomposition of Morocco’s main macroeconomic aggregates into long-term trends and short-term cyclical components. In this approach, the smoothing parameter 𝜆 determines the flexibility of the trend higher values generate smoother long-term trajectories, while lower ones capture more shortterm fluctuations. Following standard practice, a value of 1600 was used for quarterly GDP data. This method highlights Morocco’s structural transformations, such as periods of sustained growth, stagnation, or disinflation, and identifies phases of economic overheating or underutilization. Prior to filtering, the selected macroeconomic variables were log-transformed to facilitate interpretation. A second smoothing stage, using a lower λ value, was applied to reduce statistical noise and refine the cyclical component. Overall, the HP filter provides a clearer understanding of Morocco’s structural trends and cyclical dynamics, offering insights into the long-term effects of economic policy. However, the analysis of the cyclical components of Morocco’s macroeconomic aggregates is based on decomposing time series into long-term trends and short-term fluctuations, the latter representing the cyclical component. This approach isolates business cycle variations around the structural trajectory of key variables such as GDP, inflation, and the real exchange rate. Cyclical components capture deviations from the trend, providing an essential framework for understanding expansions, recessions, and stabilization phases. The primary method used is the Hodrick–Prescott (HP) filter, which separates short-term cycles from long-term trends by minimizing a smoothing function. The smoothing parameter λ controls trend flexibility, with higher values producing smoother trends and lower values capturing more short-term variation; a conventional value of 1600 is used for quarterly data. For robustness, complementary techniques such as ARIMA, Kalman filters, and the Baxter– Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6432 King filter are also employed to validate the extracted cycles and identify co-movements among variables. Once extracted, cycles are analyzed through indicators of amplitude, duration, and synchronization to assess their intensity, periodicity, and coordination across variables. This methodology highlights the main characteristics of Morocco’s business cycles and provides insights into the effectiveness of economic policies in mitigating recessions and sustaining expansions. 4. Results 4.1 Presentation of the Trend Components of Macroeconomic Aggregates The analysis reveals a continuous depreciation of Morocco’s real exchange rate between 2015 and 2023, reflecting several underlying economic dynamics. This persistent decline may indicate a weakening of the country’s competitiveness, possibly driven by higher domestic inflation relative to key trading partners. Such a price differential makes Moroccan exports relatively more expensive, reducing their attractiveness abroad. The trend may also stem from structural imbalances in the balance of payments, particularly a persistent trade deficit. When imports consistently exceed exports, downward pressure on the real exchange rate arises, especially if financed through increased borrowing or the depletion of foreign reserves. Moreover, expansionary fiscal or monetary policies such as low interest rates stimulating domestic demand—can further depreciate the real exchange rate by encouraging capital outflows. External factors, notably fluctuations in energy and agricultural commodity prices, also play a role, as Morocco’s dependence on energy imports makes its currency vulnerable to rising global prices. The analysis of Morocco’s nominal exchange rate from 2015 to 2023 reveals a U-shaped pattern, with an initial depreciation of the dirham followed by a gradual recovery after 2020. The early decline was mainly driven by a persistent trade deficit, expansionary monetary policies, and higher domestic inflation, which weakened the currency’s value. From 2020 onward, the dirham appreciated due to monetary and structural reforms, improved trade performance particularly in agriculture, phosphates, and tourism and renewed investor confidence. This evolution reflects a transition from external imbalance to greater macroeconomic stability and a gradual strengthening of the national currency. The analysis of Morocco’s interest rate from 2015 to 2023 reveals a U-shaped trend, mirroring the nominal exchange rate’s evolution. Between 2015 and 2020, the steady decline in interest Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6433 rates reflected an expansionary monetary policy by the Moroccan Central Bank aimed at stimulating economic growth, facilitating credit access, and countering weak economic performance and external shocks. From 2021 onward, the gradual rise in interest rates indicates a policy shift toward normalization, driven by rising inflationary pressures, improved growth prospects, and the need to stabilize the national currency. This upward adjustment also suggests efforts to curb excessive credit demand and attract foreign capital. The overall pattern highlights the Central Bank’s adaptive approach, moving from monetary easing during the COVID-19 crisis to cautious tightening as economic conditions improved. The analysis of Morocco’s Gross Domestic Product from 2015 to 2023 shows a steady upward trend, reflecting sustained economic growth throughout the period. GDP increased from 11.41 in 2015 to 11.48 in 2023, indicating a gradual strengthening of national economic activity. This continuous growth can be attributed to structural reforms aimed at diversifying the economy, enhancing competitiveness, and attracting foreign investment. Key sectors such as agriculture, phosphates, textiles, automotive, and tourism have been major contributors. Public investment in infrastructure roads, ports, and renewable energy also played a crucial role in boosting productivity and reducing logistical costs. The absence of major downturns highlights Morocco’s resilience to external shocks, including commodity price fluctuations and the COVID-19 pandemic. However, while macroeconomic growth remains robust, it does not necessarily guarantee inclusive prosperity. Complementary indicators such as GDP per capita, unemployment, and income inequality are essential to assess the social impact of this growth. The analysis of Morocco’s Consumer Price Index (CPI) from 2015 to 2023 reveals a sharp upward trend, especially after 2020, with inflation accelerating from around 1.4% in 2015 to nearly 6.7% in 2023. Between 2015 and 2019, inflation remained stable and well-controlled, reflecting effective monetary and fiscal management. However, starting in 2020, the CPI rose sharply due to multiple shocks. The COVID-19 pandemic disrupted global supply chains, creating shortages and raising production costs, while expansionary fiscal and monetary policies boosted domestic demand beyond available supply. From 2021 onward, inflationary pressures persisted, driven by rising global prices of energy and food commodities, and possibly by a depreciation of the Moroccan dirham, which increased import costs. This sustained rise in prices has eroded household purchasing power, raised Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6434 production costs for firms, and threatened external competitiveness. If unchecked, persistent inflation could force the Central Bank to tighten monetary policy, potentially slowing economic growth. 4.2 Presentation of the Cyclical Components of Macroeconomic Aggregates This subsection focuses on analyzing the cyclical components of Morocco’s key macroeconomic aggregates to identify short-term economic fluctuations around their long-term trends. Unlike trend components, which reveal the structural trajectory of economic variables, cyclical components highlight temporary deviations that reflect phases of expansion and contraction in economic activity. Examining these fluctuations provides valuable insights into Morocco’s business cycle dynamics and helps assess the country’s short-term economic conditions. The analysis depicts the cyclical fluctuations of Morocco’s nominal exchange rate from 2015 to 2023, after extracting the long-term trend to isolate short-term variations. This analysis highlights temporary or seasonal deviations that are not driven by fundamental economic trends. Between 2015 and 2018, the cycles exhibit pronounced peaks and troughs, reflecting periods of volatility potentially caused by external shocks, commodity price fluctuations, or domestic policy adjustments. Positive cycles in 2017–2018 likely correspond to temporary currency appreciations due to capital inflows or improved trade balances. From 2019 to 2021, fluctuations moderate, suggesting a relatively stable economic environment. However, in 2022, the nominal exchange rate shows a sharp increase in volatility, possibly triggered by rising inflationary pressures, external shocks, capital movements, or monetary policy adjustments such as interest rate hikes. By 2023, volatility subsides, indicating a return to relative stability, likely due to corrective policy measures or the dissipation of prior shocks. The analysis highlights the cyclical fluctuations of Morocco’s interest rate from 2015 to 2023, after removing the long-term trend. Cyclical analysis captures short-term variations around the general trend, reflecting temporary factors or specific economic events. Between 2015 and 2019, interest rate cycles were relatively stable, indicating a balanced monetary policy by the Moroccan central bank and a period of economic calm with favorable domestic and external conditions. Revue Internationale de la Recherche Scientifique (Revue-IRS) - ISSN : 2958-8413 http://www.revue-irs.com 6435 From 2019, the cycles declined sharply, reaching a trough in 2020, reflecting an accommodative monetary stance in response to the COVID-19 crisis. The central bank reduced rates to support borrowing, economic activity, and to prevent a prolonged recession, representing significant monetary stimulus. Starting in 2021, cycles reversed with a rapid increase, peaking in 2022, reflecting the gradual normalization of policy amid economic recovery, rising demand, inflationary pressures, and the need to stabilize the national currency. The peak in 2022 corresponds to rapid interest rate hikes aimed at controlling inflation amid global supply disruptions and rising commodity prices. By 2023, cycles stabilized at relatively high levels, suggesting a more restrictive monetary policy to counter persistent inflation. Overall, Morocco’s central bank shifted from an expansionary stance in 2020 to a more restrictive policy in 2022–2023 to stabilize the economy. Morocco’s GDP cycles from 2015 to 2023 show moderate fluctuations around the long-term trend between 2015 and 2019, indicating stable growth, with slightly positive deviations in 2018–2019 linked to strong sectoral performance. In 2020, GDP cycles plummeted sharply due to the COVID-19 pandemic, reflecting a severe economic contraction. From 2021 onward, cycles rebounded rapidly, signaling recovery and above-trend growth during the post-recession catch-up phase, while 2022–2023 show continued stabilization around the trend. The cyclical analysis of Morocco’s Consumer Price Index (CPI) from 2015 to 2023 highlights short-term fluctuations around long-term trends. Between 2015 and 2019, inflation remained relatively stable, with minor deviations. From 2019, CPI cycles rose sharply, peaking in 2020 during the COVID-19 pandemic due to supply disruptions and demand shocks, followed by a temporary correction. Post-2020, cycles became highly volatile, with a historical peak in 2022 driven by global commodity price increases, external shocks, and expansionary policies, prompting tighter monetary measures. In 2023, CPI cycles fell sharply, indicating a return toward price stability, although short-term sensitivity persists. Smoothed cycles using an HP filter (λ=100) highlight these variations clearly. The analysis depicts the smoothed cycles of Morocco’s real exchange rate from 2015 to 2023, obtained using a Hodrick-Prescott filter with a smoothing parameter of 100 to remove shortterm noise and highlight underlying cyclical fluctuations. The real exchange rate reflects the