Monetary Policy in Low Financial Development Countries

2021 ◽  
Author(s):  
Juan Antonio Morales ◽  
Paul Reding
Keyword(s):  
Monetary Policy ◽  
Financial Development ◽  
Financial Stability ◽  
Policy Making ◽  
Inflation Targeting ◽  
Emerging Market ◽  
Empirical Studies ◽  
Central Banks ◽  
Microfinance Institutions ◽  
Trade Offs

The book gives broad coverage of monetary policy issues in Low Financial Development Countries (LFDCs). These low- and lower-middle-income countries are characterized by a predominance of bank finance, shallow financial markets, low financial inclusion, weak integration with world capital markets, and a high degree of informality in economic activity. Monetary policy acquires special twists, making it different in many aspects from the policies followed in advanced and emerging market economies. The book covers the main facets of monetary policy-making, using an approach that combines discussion of theoretical arguments, of results from empirical studies, and of policy experiences relevant for LFDCs. The book presents the monetary policy instruments used in these countries, and assesses the specificities of their monetary transmission mechanism. It evaluates the advantages, drawbacks, and challenges of the different nominal anchors they may choose from: exchange rate targeting, monetary targeting, and inflation targeting. This discussion is set against the background of the three main goals pursued by central banks: price, output, and financial stability. Particular attention is devoted to the issue of the credibility of central banks and to the trade-offs they face when external shocks, to which these countries are very vulnerable, lead to conflicts among the three goals they pursue. The book also covers more specific topics, such as challenges raised by fiscal dominance and by dollarization, implications of informal labour markets and of microfinance institutions for monetary policy-making, and the role of models for forecasting and policy evaluation.

Monetary Policy Trade-Offs and Monetary Policy Credibility

2021 ◽  
pp. 145-184
Author(s):  
Juan Antonio Morales ◽  
Paul Reding
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Stability ◽  
Phillips Curve ◽  
Emerging Market ◽  
Empirical Studies ◽  
Theoretical Background ◽  
Central Bank Independence ◽  
Trade Offs ◽  
Key Aspects

This chapter focuses on two key aspects of the monetary policy process: the trade-offs between the three goals that fall into the purview of central banks, price stability, output stabilization, and financial stability; and the role of central bank independence and transparency in enhancing the credibility and the efficacy of monetary policy. The chapter presents the theoretical background for each issue and discusses related empirical studies. The emphasis is on how the specific features of LFDCs impact the nature of the policy trade-offs, like informality in the labour market for the Phillips curve and the inflation–output trade-off, or the unsophisticated financial markets for financial stability concerns. In the discussion on central bank independence and transparency, the situation in LFDCs is compared with that in advanced and emerging market countries.

INFLATION TARGETING: IT'S NOT BROKE, IT DOESN'T NEED FIXING, BUT CAN IT SURVIVE?

2010 ◽  
Vol 01 (01) ◽  
pp. 59-80
Author(s):  
PIERRE L. SIKLOS
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Global Financial Crisis ◽  
Emerging Market ◽  
Asset Price ◽  
Central Banks ◽  
Economic Downturn ◽  
Price Increases ◽  
The Global Financial Crisis ◽  
Nominal Anchor

Until the end of 2005 there were few outward signs that the inflation targeting (IT) monetary policy strategy was deemed fragile or that the likelihood of abandoning it was high. In light of the severe economic downturn and the global financial crisis that has afflicted most economies around the world since at least 2008, it is worth reconsidering the question of the fragility of the inflation targeting regime. This paper reprises the approach followed in Siklos (2008) but adds important new twists. For example, the present study asks whether the continued survival of IT is due to the fact that some of the central banks in question did take account of changes in financial stress. The answer is no. Indeed, many central banks are seen as enablers of rapid asset price increases. The lesson, however, is not that inflation targeting needs to be repaired. Instead, refinements should be considered to the existing inflation targeting strategy which has evolved considerably since it was first introduced in New Zealand 20 years ago. Most notably, there should be continued emphasis on inflation as the primary nominal anchor of monetary policy, especially in emerging market economies (EME), even if additional duties are assigned to central banks in response to recent events.

scholarly journals Regular Econometric Model of Taylor for Albania

2016 ◽  
Vol 5 (1) ◽  
pp. 123
Author(s):  
Ergys Misha
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Interest Rates ◽  
Financial Stability ◽  
Inflation Targeting ◽  
Inflation Rate ◽  
Stock Exchange ◽  
Central Banks ◽  
Financial Assets

The Taylor’s Rule Central Banks is applying widely today from Central Banks for design the monetary policy and for determination of interest rates. The purpose of this paper is to assess monetary policy rule in Albania, in view of an inflation targeting regime. In the first version of the Model, the Taylor’s Rule assumes that base interest rate of the monetary policy varies depending on the change of (1) the inflation rate and (2) economic growth (Output Gap).Through this paper it is proposed changing the objective of the Bank of Albania by adding a new objective, that of "financial stability", along with the “price stability”. This means that it is necessary to reassess the Taylor’s Rule by modifying it with incorporation of indicators of financial stability. In the case of Albania, we consider that there is no regular market of financial assets in the absence of the Stock Exchange. For this reason, we will rely on the credit developmet - as a way to measure the financial cycle in the economy. In this case, the base rate of monetary policy will be changed throught: (1) Targeting Inflation Rate, (2) Nominal Targeting of Economic Growth, and (3) Targeting the Gap of the Ratio Credit/GDP (mitigating the boom cycle, if the gap is positive, and the contractiocycle if the gap is negative).The research data show that, it is necessary that the Bank of Albania should also include in its objective maintaining the financial stability. In this way, the contribution expected from the inclusion of credit gap indicators in Taylor’s Rule, will be higher and sustainable in time.

Independent Agencies, Distribution, and Legitimacy: The Case of Central Banks

2019 ◽  
Vol 114 (2) ◽  
pp. 591-595
Author(s):  
PETER DIETSCH
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Policy Making ◽  
Central Banks ◽  
Institutional Arrangements ◽  
The Other ◽  
Trade Offs ◽  
The One ◽  
Alternative Solutions

Delegation to independent agencies can reap real benefits for policy-making. In the case of monetary policy, it shores up the credibility of the central bank. However, the discretion of IAs needs to be constrained to ensure their legitimacy. This letter focuses on one potential constraint, namely, the idea that IAs should not make choices on distributional trade-offs. Given that monetary policy today has significant distributive consequences, if this constraint were respected, the independence of central banks would have to be repealed. This would be just as undesirable as a monetary policy whose distributive consequences remain unchecked. Instead, this letter encourages the search for alternative solutions and puts forward three possible institutional arrangements to manage the tension between the distributive consequences of monetary policy on the one hand and central bank legitimacy on the other.

Inflation Targeting and the IMF

Policy Papers ◽  
2006 ◽  
Vol 2006 (6) ◽  
Author(s):  
Keyword(s):  
Developing Countries ◽  
Monetary Policy ◽  
Emerging Markets ◽  
Inflation Targeting ◽  
Technical Assistance ◽  
Emerging Market ◽  
Central Banks ◽  
Policy Framework ◽  
Monetary Policy Framework ◽  
The Imf

Inflation targeting is becoming the monetary policy framework of choice in a growing number of emerging market and developing countries. This paper examines the experience of non-industrial inflation targeting countries to review the implications for the Fund’s approach to surveillance, technical assistance, and the design of conditionality in Fund-supported programs. For this examination, the paper uses macroeconomic data, technical assistance reports, and a new survey of central banks in selected emerging markets.

scholarly journals Inflation targeting: From “constrained discretion” to singularity

2020 ◽  
pp. 39-52
Author(s):  
Oleg Buklemishev
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Financial Stability ◽  
Inflation Targeting ◽  
Central Banks ◽  
Political Uncertainty ◽  
Policy Regime ◽  
Dynamic Inconsistency ◽  
Monetary Authorities ◽  
International Monetary Policy

In recent years, inflation targeting has become a staple of international monetary policy. The paper considers different challenges this monetary policy regime faces with regard to suppressed inflation, attaining the zero lower bound on the policy interest rates, and committing central banks to simultaneously pursue additional objectives such as financial stability. Inflation targeting has proved inefficient in raising inflation to the target zone from below, and unorthodox monetary policy tools have not proved their validity in this regard yet. As a result, monetary authorities are more inclined to discretion allowing them to compromise different aspects of “pure” inflation targeting. The value of this discretion is based on asymmetric information and boosted by additional functions assumed by central banks. However, it might bring about serious problems of dynamic inconsistency, compounded political uncertainty, and bureaucratic misconduct. Since none of the alternatives to inflation targeting currently looks fully satisfactory, it is concluded that the inflation targeting regime should be transformed to take into account the current situation, but a necessary precondition for the effectiveness of the new regime is enhanced accountability of central banks.

When Finance and the Real Economy Collide

2017 ◽  
Author(s):  
Pierre L. Siklos
Keyword(s):  
Monetary Policy ◽  
Financial Markets ◽  
Processing Speed ◽  
Financial Stability ◽  
Institutional Design ◽  
Central Banks ◽  
Real Economy ◽  
Macroeconomic Variables ◽  
Trade Offs ◽  
Crisis Responses

There exist potential conflicts between the processing speed of financial markets and the persistence of macroeconomic variables that dictate the conduct of monetary policy. Maintaining financial stability can require fast thinking, while monetary policy decisions involve slow thinking. A financial stability motive, buttressed by a macroprudential regime, is not enough. Financial stability adds complexity to institutional design that policymakers have yet to face up to. Central banks today are uncomfortable about whether to surprise financial markets. There are more examples of central banks failing unintentionally, surprising the financial markets, than of successful interventions of this kind. Trade-offs between monetary policy and financial stability suggest that conventional pre-crisis responses to economic shocks make it less desirable to resort to changes in central bank policy rates. Are policy rate increases especially too blunt an instrument to deal with a threat to financial instability? Possibly less than we think.

scholarly journals STOCK MARKET COINTEGRATION AND DIVERSIFICATION OPPORTUNITIES UNDER INFLATION TARGETING REGIME

2021 ◽  
Vol 4 (4) ◽  
Author(s):  
Albina Hysaj ◽  
Güven Sevil
Keyword(s):  
Monetary Policy ◽  
Stock Market ◽  
Inflation Targeting ◽  
Emerging Market ◽  
Central Banks ◽  
Stock Index ◽  
Long Run ◽  
Monetary Authorities ◽  
Short Run ◽  
Low Levels

Monetary authorities use monetary policy to achieve their objectives. Keeping inflation stable, at low levels is the main objective of central banks. While central banks use monetary policy to control inflation, its decisions also impact the overall economy and financial market. The aim of this paper is to investigate the diversification opportunities in 17 developed and emerging market economies that have implemented inflation targeting. By using Johansson cointegration and Gregory Hanssen tests we investigate the existence of long run co integration relationship between different markets. Moreover, we investigate the short run diversification opportunities by analyzing the short run exposure of each stock index to the S&P 1200 Global Index. The results of our study suggest that stock markets of Brazil and Czech Republic offer very good diversification opportunities, while the Colombian stock market offers very limited diversification opportunities as Colombia stock index has co integration relationship with almost other indices. JEL: G15, G11 <p> </p><p><strong> Article visualizations:</strong></p><p><img src="/-counters-/edu_01/0726/a.php" alt="Hit counter" /></p>

Is inflation targeting useful for economic growth?

2017 ◽  
pp. 62-74 ◽  
Author(s):  
P. Kartaev
Keyword(s):  
Economic Growth ◽  
Monetary Policy ◽  
Test Performance ◽  
Inflation Targeting ◽  
Developing Economies ◽  
Empirical Studies ◽  
Growth Regime ◽  
Potential Channels

The paper presents an overview of studies of the effects of inflation targeting on long-term economic growth. We analyze the potential channels of influence, as well as modern empirical studies that test performance of these channels. We compare the effects of different variants of inflation targeting (strict and mixed). Based on the analysis recommendations on the choice of optimal (in terms of stimulating long-term growth) regime of monetary policy in developed and developing economies are formulated.

scholarly journals Janus Face of Inflation Targeting_Walter_PrePrint

2019 ◽  
Author(s):  
Timo Walter
Keyword(s):  
Monetary Policy ◽  
Inflation Targeting ◽  
Recent Trend ◽  
Central Banks ◽  
Fine Tuning ◽  
Fine Grained ◽  
Prototype Development ◽  
The Us ◽  
Fundamental Uncertainty ◽  
Overall Effectiveness

In the 1980s, central banks around the world stumbled upon a new method for conducting theirmonetary policy: instead of the heavy-handed, „hydraulic“ manipulation of monetary aggregates,they learned to „govern the future“ by managing the expectations of market actors directly.New and better indicators and forecasts would provide the basis for a new communicativecoordination of markets expectations, permitting a more fine-grained and effective implementationof monetary policy, particular in controlling inflation.Focusing on the US Federal Reserve’s prototype development of inflation-targeting, this paper putsthis storyline to the test. Against the recent trend in sociology to conceive of expectations andfuturity as modes of coordination that thrive under conditions of (fundamental) uncertainty that defyrational calculation, I argue that futurity and the formation expectations inextricably depend onprior processes of formalization.Examining the transition to modern ‘inflation targeting’ monetary policy, I show how theeffectiveness of coordination by expectation is achieved by extensive processes of proceduralizationand standardization. While increasing the technical efficiency of fine-tuning expectations, thesegains are only possible because of the procedural narrowing of the scope of communicativeinteraction, which may significantly affect the overall effectiveness of this mode of coordination.I conclude with a call to more closely examine how formal and informal modes of coordination aremutually interdependent – and how the nature of their entanglements affects their effectiveness.

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