Transcript Comments: “Inflation Targeting Framework for Jamaica: An

Comments: “Inflation Targeting
Framework for Jamaica: An
Empirical Exploration”
Myriam Quispe-Agnoli
Federal Reserve Bank of Atlanta
Conference on Inflation Targeting
October 4 –5, 2004
Objective of the paper
• Is inflation targeting (IT) an
effective framework for monetary
policy in Jamaica?
Paper Structure
• Monetary Policy in Jamaica since 1990.
• Literature review comparing the IT
experience of developed and developing
countries.
• Review of the fundamental requirements for
IT in Jamaica.
• Discusses the implementation of IT in
Jamaica.
Comments’ Outline
• I will follow the outline of the paper for my
comments:
– First, I will look at the preconditions for
inflation targeting (IT) followed by questions
on specific topics
– Second, I will discuss the some issues on IT
design and implementation
– Finally, I will bring general questions
Suggested list of preconditions
before adopting IT
•
•
•
•
Central bank independence (CBI).
Macroeconomic stability.
Financial system stability.
Other institutional elements.
Preconditions for IT in Jamaica
• Does the Central Bank have a reasonable
degree of operational independence to ensure
flexibility in monetary policy towards achieving
the inflation target?
Central Bank is independent but…
- There is no law that prohibits public financing
- Political independence is limited by the presence
of government representatives on the board
Some Questions Regarding
Central Bank Independence
• Table to compare CBI estimates of IT
developing countries and Jamaica.
• What do you think about CBI during the
monetary targeting period, 1996-2002?
• What can the financing of the fiscal deficit
tell us about CBI?
Preconditions for IT in Jamaica
• Is monetary policy influenced by public
sector borrowing from the bank?
– Between 1994 and 1998, heavy reliance on
seigniorage for public financing.
– In subsequent years, external borrowing was
the main source for public financing.
– However, fiscal imbalances remain at high
levels.
Some Questions Regarding
Fiscal Dominance
• Fiscal imbalances might limit or restrict the
credibility of future IT in Jamaica
• Is there a plan to implement tax reform or
an effort to reorganize government
expenditures in Jamaica?
• Do you think that the domestic capital
market might become an alternative source
for public financing?
Preconditions for IT in Jamaica
• A flexible and independent monetary
policy requires a “deep” financial system
that is an alternative source for public
financing.
– According to the paper, there is a well
functioning financial market in Jamaica.
• Competitive interest rates, no financial repression.
• Diversified instruments for savings and investment.
Some Questions Regarding
Financial Depth
• Could you tell us about the performance of private
credit by banks as percentage of GDP?
• Is there a regulatory and supervisory institution for
the banking system?
• What is the size and performance of the stock and
bond market?
• Is the financial system deep enough to absorb the
placement of public debt?
Issues of IT design and
implementation
• Bosede analyzes the appropriate inflation
index to use for IT, concluding that either
core or headline inflation could be used as
the relevant price index.
• The author also uses a VAR model to show
the effect of different inflation target horizon
and the bandwidth on the stability of
monetary policy.
• Conclusion: a 24-month horizon is the
adequate for a successful IT implementation.
General Questions
• Given external shocks, is the Central Bank's
commitment to price stability as a primary goal
credible?
• What is the import component of the price index?
• What is the level of the dollarization degree of the
financial system?
• Is there an effort to coordinate fiscal and debt
management policies?
• What is the likelihood of new legislation to protect
Central Bank independence?
Some Macroeconomic Indicators
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Inflation rate
35%
20%
26%
10%
9%
6%
8%
7%
7%
10%
* (-) appreciation
Source: IFS, IMF.
Change in
Credit to Private Sector
Real GDP
Exchange Rate* as % of GDP (%)
33%
23%
1.0%
6%
24%
2.3%
6%
25%
0.4%
-5%
24%
-1.1%
3%
28%
-1.2%
7%
28%
0.9%
9%
31%
0.8%
8%
12%
1.5%
5%
14%
1.1%
19%
n.a.
n.a.