1、IMF高级宏观经济学研修班高级宏观经济学研修班课程课程CT1405MMFL02MonetaOutlineI.What are the ultimate goals of monetary policy?II.What are the alternative frameworks and how do they work?III.How to choose a monetary framework?IV.What choices were made in the past?V.How well did they perform?VI.Chinas choicesThis training mat
2、erial is the property of the International Monetary Fund(IMF)and is intended for use in IMFs Institute for Capacity development(ICD)courses.Any reuse requires the permission of ICD.I.What are the ultimate goals of monetary policy?1.Price stability2.Output and employment3.Exchange rate stability4.Pos
3、t global crisis,calls to also target financial stabilityThe relationship between inflation and cyclical unemployment has changed over time Apparent that the slope of Phillips curve has fallenSource:April 2013 WEOJV 13.13.What can monetary policy do?Can effectively control prices and exchange rates n
4、ominal variablesCan serve as a nominal anchor in the economyCan contribute to economic growth and help create jobs through low and stable inflationBut it cannot be a real anchorunemployment,growth,and real exchange rate cannot be affected persistentlyJV 13.13.Monetary policy affects demand,not suppl
5、y Too much demand stimulus stokes inflation Stabilize output around its potential and inflation around the inflation target Jointly minimize volatility of output and inflation sy;spQuantityPriceADASLong-run ASJV 13.13.Exchange Rate Policy:OverviewIn the short run,the nominal ER level affects the rea
6、l exchange rate:If domestic inflation is high,a fixed exchange rate might appreciate the RER.“The real exchange rate is always flexible”An appreciated RER affects competitiveness of exports and can lead to current account deficits.A flexible ER might be a powerful tool to restore external equilibriu
7、m.II.What are the Alternative Monetary and Exchange rate Frameworks and how do they work?“There are many ways to skin a cat”Stone and Bhundia classificationJV 13.13.Compatible choicesCountries need to choose a monetary policy strategy(e.g.,money growth targets or inflation targets)and an exchange ra
8、te arrangementThe two choices must be compatibleJV 13.13.The Impossible Trinity CAPITAL CONTROLSMonetaryindependenceHard PegPUREFLOATCapital MobilityExchange ratestabilityChinaU.S.,JapanEUThe“impossible trinity”It is impossible to simultaneously maintain:a fixed exchange rateand autonomous monetary
9、policy to pursue goals for domestic economic activity and price stabilityifthe economy relies on a large volume of potentially volatile and internationally mobile sources of financeJV 13.13.Four Viable Alternative Monetary and Exchange Rate Regimes1.Exchange rate targeting2.Monetary aggregates targe
10、ting3.Inflation targeting4.Other“eclectic”frameworksJV 13.13.HARD PEGS Exchange arrangements with no separate legal tender Currency union Dollarization Currency board INTERMEDIATE(Soft Pegs)Conventional peg Stabilized arrangement Peg with horizontal bands Crawling peg Crawl-like arrangement FLOATING
11、 Floating Free floatingRange of Options for Exchange Rate1.Exchange rate targeting The exchange rate is the nominal anchor Pre-World-War-I gold standard Bretton-Woods regime(1945-71)All countries pegging to gold through the U.S.dollar Argentinas currency board(1991-2001)“Hard”peg Dollar peg in South
12、 Korea,Thailand,Indonesia“Soft”peg West Africa Monetary Union,European Monetary Union(regional system)JV 13.13.How does ER targeting work?Keep the ER on target(level,“crawl”,and so on)As long as the capital account is at least partly open,domestic interest rate world interest rate+risk premium The“l
13、aw of one price”(PPP)will take care of inflation convergence(dz=p*-p)Maintain liquidity in the banking system Its a comparatively simple regime to operate!JV 13.13.“The devil is in the detail”A country may say that they are maintaining a crawling peg/managed float/free float,but:1.Have no volatility
14、 of the exchange rateWhile officially floating,some central banks used to phone commercial bank with“suggested”ERs2.Accumulate international reservesDistinguish de jure and de facto regimes!China is de jure managed floating arrangementBut de facto classified as a“crawl-like arrangement”by IMF in 201
15、3 Article IV(as the RMB-U.S.$rate has remained in a 2 percent crawling band)JV 13.13.Chinas peg was stable against US$mid-1990s to mid 2000s but nominal effective exchange rate movedJV 13.13.Chinas real effective exchange rate has appreciated more than the nominal rateJV 13.13.2.Monetary aggregates
16、targeting Monetary growth is the nominal anchor.Based on the quantity theory of money(Friedman,1956):MV=PY Inflation from“many dollars behind few goods.”Monetary policy instruments adjusted to target growth rate of money supply(e.g.,broad money)JV 13.13.2.Monetary aggregates targeting The exchange r
17、ate has to float as long as the capital account is open The fiscal position must be under control.Why?M2=NFA+NDA.Examples:Industrial countries(the late-1970s to mid-1980s)About 30 countries today(mostly low-income)Inspired the ECBs Monetary Pillar.JV 13.13.How does MT work?1.Provide liquidity consis
18、tent with your2.intermediate target(M2 growth)3.to achieve your ultimate objective(p*)Need to believe in p p =f(M)JV 13.13.3.Inflation targeting Inflation forecast is the nominal anchor Adjust monetary policy instruments to keep the central banks forecast of inflation consistent with a pre-announced
19、 target Examples:New Zealand,Chile,U.K.,Czech Republic,Poland,Romania,Thailand,Brazil,Ghana.JV 13.13.Is the forecast of inflation on target?YesShould policy respond?No change in instrument Determine size of responseNoNo change in instrumentYesNo Change instrument“Escape clauses”permit departure from
20、 the target Communicate Communicate Communicate How does IT work?4.Eclectic monetary policy What is the nominal anchor?Adjust monetary policy instruments to pursue stable economic growth and low inflation,but with no formally pre-announced targets Examples:U.S.,Euro Area,Japan,India,.JV 13.13.How do
21、es eclectic policy work?Central banks have inflation objectives,but not as explicit on target and horizon as formal IT countries ECB:“inflation below,but close to,2 percent”Fed:“the goals of maximum employment,stable prices,and moderate long-term interest rates”.Decisions are also based on forecasts
22、 of inflation Good system to forecast inflation and a good understanding of the transmission mechanism is crucial Difference between ITs and“eclectics”is a different level of communication,although convergence.JV 13.13.Group(Break into groups of 5-6 to discuss question below.Nominate one person from
23、 your group who will summarize the discussion)What are the key factors behind Chinas choice of monetary and exchange rate framework in recent years?III.How to choose a monetary framework There are always pros and consJV 13.13.What is the appropriate monetary and exchange rate policy regime?Many cons
24、iderations are relevant Similar countries sometimes make different choices The best choice for any particular country may change over time JV 13.13.Choice of monetary frameworkEach monetary framework has its advantages and disadvantages.The choice depends on policy objectives and their relative impo
25、rtance:1.Reduce/stabilize inflation2.Stabilize output fluctuationsU.S.:“maximum sustainable employment and low inflation”3.Avoid financial crises(financial stability)4.International or regional economic integrationJV 13.13.1.Exchange rate targeting Provided the authorities have a clear commitment to
26、 ER stability,expectations of inflation will stabilize Short-run deviations are inevitable A long list of risksJV 13.13.Risks of exchange rate targeting Fiscal dominance undermines the regime The peg currency may not be consistent with trade patterns(ex.Argentinean and Brazilian pegs to the U.S.$in
27、the 1990s and subsequent exits)Pegs encourage build up of balance sheet vulnerabilities Private sectorused to stable exchange rateignores exchange rate risk(plus bailout expectations)Build up in foreign currency debt(Asian crisis,Hungary and Romania lately)JV 13.13.Chinas Current Account Surplus has
28、 fallen in recent years and REER has appreciatedImpossible trinity again Loss of monetary policy as a stabilization tool With international capital mobility,impossible to target exchange rate and use monetary policy for output stabilization But the loss of independent monetary policy may be offset b
29、y benefits of regional integration e.g.Euro area,WAEMU Eliminating exchange rate risk lowers transactions costs and increases tradeJV 13.13.Bottom line on ER targeting+Simple to operate+“Gains from trade”+can help“import”low inflation Fiscal dominance Need to find the right peg currency(or basket)Lo
30、ss of monetary policy as a stabilization tool Higher risk of speculative attacks and crises Financial sector vulnerabilities as private sector takes on exchange rate risk Costs of sterilization for central banksJV 13.13.aSource:Andrew Cheng,2013 PBC Conference on Capital FlowsJV 13.13.2.Monetary Agg
31、regates targeting For monetary targeting to achieve price stability,there must be a stable relationship between monetary aggregates and inflation In many countries,this has broken down over the years because of financial innovations making velocity unstable and difficult to forecast.Monetary targeti
32、ng has lost much of its appealJV 13.13.Velocity of M2 was unstable in 70s and 80s,esp.in Germany and JapanJV 13.13.In China too,the link between money and nominal GDP has been not been stable Bottom line on monetary targeting+Operational simplicity and theoretically sound but the regime is not intui
33、tive The public does not understand what is“broad money”,“narrow money”,etc Empirically dubious The short-run money-to-inflation nexus disappeared in the 1970s The causality from money to output/prices does not hold in the dataJV 13.13.3.Flexible exchange rate&inflation targeting Explicit inflation
34、target and transparent framework,may help establish credibility Monetary policy needs to be free to pursue the inflation objective As is other frameworks,fiscal dominance would damage the system;but perhaps to a lesser degree than in ER targetingJV 13.13.Flexible ER and IT Operationally complex:need
35、 to know the whole monetary transmission Requires a working link from policy rates interbank rates long rates With no ER anchor,the nominal ER can be volatile(“fear of floating syndrome”)With a weak ER pass-through,the real ER is also volatile shocks to output Emphasis on price stability may cloud o
36、ther CB responsibilities(financial stability)JV 13.13.Need to Learn to FloatFear of floating exchange rate is a barrier to many emerging markets in adopting ITVoluntary transitionprior to the transition,countries tend to have:stronger banking supervision,including to reduce currency mismatches on ba
37、lance sheetsmore developed securities markets;increased central bank independence,with emphasis on price stability then adopt inflation targeting.Crisis-driven transitionafter the transition,countries improve banking supervision and develop securities markets.Lessons from Three Cases New Zealand Cre
38、dibility problem initially Started with strict approach Became more flexible over time,as inflation expectations became anchored Chile and Israel were able to use inflation targeting to disinflate successfully Israel showed that can adopt inflation targetting even without meeting preconditionsBottom
39、 line on inflation targeting A“nominal anchor”without a ER commitment Monetary policy retains independency under full capital mobility Fosters transparency and accountability Technically demanding Focus on price stability may be at the expense of other objectives “Fear of floating”considerationsJV 1
40、3.13.One lesson from the Great Recession:central banks must do more than just target inflationJV 13.13.Is Inflation Targeting Dead?Old view:Monetary policy should aim for a low and stable inflation rate.New view:Stable inflation is necessary but not sufficient for macroeconomic stability.Monetary po
41、licy should react more strongly to indicators other than output and inflation to mitigate damaging asset price boom-bust cycles.Low inflation limits the scope of monetary policy in deflationary recessions.Raise the inflation target?About 2/3s of IT central banks currently target headline inflation o
42、ver the medium-term of less than 3 percent4.Flexible exchange rate&eclectic monetary policy+No explicit commitment to a“nominal anchor,such as exchange rate,money,or infaltion-Lots of discretion+It may work if the Central Bank already has a lot of credibility(Fed,Swiss National Bank)It may not work
43、to achieve disinflationJV 13.13.IV.What Choices were made in the PAstJV 13.13.Bretton-Woods era(1946-1971)Fixed exchange rates currencies pegged to the U.S.dollar&U.S.dollar pegged to gold Stabilizing the domestic economy was a primary objective of monetary policy Controls on international capital f
44、lows 1950s to 1970s was a period of financial repression in advanced countriesJV 13.13.Industrial countries after 1971 European countries went from pegs narrow bands wide bands a common currency Other industrial countries adopted monetary aggregate targets in the late 1970s or early 1980s but abando
45、ned them a few years later Most of non-euro industrial countries have adopted formal inflation targets(Australia,Canada,Iceland,New Zealand,Norway,Sweden,United Kingdom)Also more than 20 emerging market countriesJV 13.13.Monetary Policy Framework(2000)Source:IMF Annual Report on Exchange Arrangement
46、s and Exchange Restrictions(AREAER),2001Note:The monetary aggregate target category includes countries that adopt monetary aggregate target framework in addition to fund supported or other monetary countries,and also countries that only adopt fund supported or other monetary programs.Exchange rate a
47、nchor and Inflation-targeting framework categories include countries that also adopt fund supported or other monetary in addition to their respective framework program(more than one nominal anchor).Monetary Policy Framework(2011)Source:IMF Annual Report on Exchange Arrangements and Exchange Restrict
48、ions(AREAER),2012Evolution of monetary regimesThere is some de facto bi-polarity Advanced Countries:Exchange Rate Regimes,1991,1999,2006(Fischer,2008),and 2012Source:2012 advance countries list is from World Economic Outlook,April 2013JV 13.13.There is some de facto bi-polarity(2)Emerging Market Cou
49、ntries:Exchange Rate Regimes,1991,1999,2006,and 2012Source:Emerging markets is SPR department official list JV 13.13.IV.How well did they perform?JV 13.13.Stone and Bhundia,2004,“A New Taxonomy of Monetary Regimes,”Annual Average CPI Inflation,1990-2003JV 13.13.JV 13.13.Continue with the exchange ra
50、te anchor(classified by IMF as crawl-like arrangement)Introduce formal monetary targeting?Move to more explicit inflation,growth,and financial stability objectives?Adopt formal inflation targeting?V.Chinas Monetary and Exchange Rate Reform optionsJV 13.13.Continuing to widen the exchange rate band w
