Introduction toIntroduction toIntroduction toIntroduction toMonetary PolicyMonetary Policyy yy y
Introductory Workshop toFinancial Programming and PoliciesFinancial Programming and Policies
Yangon, MyanmarJanuary 19–23, 2015
Jan GottschalkTAOLAMTAOLAM
IMF-TAOLAM training activities are supported by funding of the Government of Japan
OutlineOutline
I C t l B k Obj tiI. Central Bank Objectives
II M t P li F kII. Monetary Policy Frameworks
2This training material is the property of the International Monetary Fund (IMF) and is intended for the use in IMF courses. Any reuse requires the permission of the IMF.
Central Bank Objectives: InflationCentral Bank Objectives: Inflation
“…it was clearly understood that my task was to get i fl i b d b l 2% ”
3
inflation above zero and below 2%.”Don Brash, former RBNZ Governor
Central Bank Objectives: Foreign Exchange StabilityCentral Bank Objectives: Foreign Exchange Stability
Avoiding large, sudden foreign exchange outflows!
• Shortage of foreign exchange can lead to loss of confidence in domestic currencydomestic currency
• Exchange rate needs to be competitive
4
Central Bank Objectives: Financial System StabilityCentral Bank Objectives: Financial System Stability
Keeping the banking system solvent!system solvent!
Well-functioning credit and payment system
5
Central Bank Objectives & FunctionsCentral Bank Objectives & Functions
M • Monetary policy• Exchange rate policy
Monetary Stability
• Prudential policy• Supervision oversight
Financial stability • Supervision, oversightstability
• FX intervention• FX reserve management• Liquidity management• Lender of last resort
Policy Operation Functions
6
Central Bank Objectives: Central Bank Objectives: Historical Experience in MyanmarHistorical Experience in Myanmarp yp y
60Annual CPI Inflation Rates (1996-2013)
40
50
60
30
40
Developing
10
20Developing AsiaMyanmar
-10
0
7
199619971998199920002001200220032004200520062007200820092010201120122013
Central Bank Objectives: CBM LawCentral Bank Objectives: CBM Law
CBM Law, Chapter II:
• The aim of the Central Bank shall be to maintain and preserve domestic price stabilitypreserve domestic price stability
• The Central Bank shall, in accordance with its aim, also endeavor to attain the following objectives:
To promote monetary stability To enhance financial system stability To develop efficient payments and settlement system To support the general economic policy of the
Government conducive to sustained economic
8
Government conducive to sustained economic development
OutlineOutline
I. Central Bank Objectivesj
II. Monetary Policy Frameworksy y
9
Monetary Policy FrameworksMonetary Policy Frameworks
Central challenge for monetary policy frameworks: Long gaps between policy decision and ultimate objective!
Policy Decision C t l B k
Long gaps between policy decision and ultimate objective!
Decision Central BankInstruments
OperatingTarget Intermediate
TargetTarget
Ultimate Indicator Variables
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Objective
Role of TargetsRole of Targets
As a result of the long ltransmission lag
between central bank instrument and ultimate objective, operating andobjective, operating and intermediate targets are needed
Target: proximateTarget: proximate goals, not objectives in and of themselves; work directly toward achieving the long-term objectives of policy
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Operating TargetsOperating Targets
Operating target: i l l htactical goals that
the central bank can influence in the short run
• Reserve money/ monetary base: The central bank can control the size of its own balance sheet
Sh i• Short-term interest rates (e.g., interbank rate (“federal funds”) in the U.S.)
12
Intermediate TargetsIntermediate Targets
• Criteria for intermediate targets– Consistent with
ultimate goals– Can be accurately– Can be accurately
measured– Timely– Can be influenced by
the central bank
13
Intermediate Targets as Nominal AnchorIntermediate Targets as Nominal Anchor
• A ‘nominal anchor’ is an i t di t t t th t h lintermediate target that helps to pin down inflationary expectations
• The choice of an intermediate target defines the monetary policy frameworkpolicy framework– Exchange rate anchor
M t t t t– Monetary aggregate target– Inflation targeting
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Classification of Monetary FrameworksClassification of Monetary FrameworksExchange Rate Regimes
Dollarization or currency union Dollarization or currency union Currency board
PegdFixed
Horizontal bands Crawling peg
FIXEDg p g
Without bandsWith bands
Floating FloatingManaged
Independent
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FLEXIBLE
Exchange Rate Regime in Myanmar:Exchange Rate Regime in Myanmar:Historical PerspectiveHistorical Perspective
• Official rate was very stable 89
10
pp
Official rate was very stable between 1950 and 2011—but it was set by government with no 3
4567
relationship to economic developments 0
12
950A
195
3A1
956A
195
9A1
962A
196
5A1
968A
197
1A1
974A
197
7A1
980A
198
3A1
986A
198
9A1
992A
199
5A1
998A
100
1A1
004A
100
7A1
010A
1
19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20
• In 2012, official rate was allowed to float and brought in line with
1,000
1,200
1,400
brought in line with market rate
200
400
600
800
0 1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Informal market rate Official exchange rate
Exchange Rate Regime Myanmar: 2013Exchange Rate Regime Myanmar: 2013
• April 2012: CBM started daily foreign currency
• De jure: effective April
daily foreign currency auctions to determine exchange rateDe jure: effective April 2, 2012, the de jure exchange rate arrangement was reclassified to a managed float from a conventional peg
• De facto: due to multiple exchange rates, de facto regime is classified as
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other managed arrangement
Monetary Targeting RegimeMonetary Targeting Regime
Policy Decision Monetary
OperationsOperations
ReserveReserve Money Broad Money
InflationBroad
Money on t k?track?
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Monetary Framework in MyanmarMonetary Framework in Myanmar
Historically close link between broad money and prices:
600
700
y y p
400
500
600
200
300CPI (2005=100)
Broad money (2005 100)
0
100
20 20 20 20 20 20 20 20 20 20 20 20
(2005=100)
001
002
003
004
005
006
007
008
009
010
011
012
19
Monetary Framework in MyanmarMonetary Framework in Myanmar
Historically, reserve money and broad money are also y y yclosely linked:
600
700
This opens possibility for central bank to influence prices via 400
500
600
Broad money (2005 100)influence prices via
its control over reserve money and
200
300
400 (2005=100)
Reserve money (2005=100)
the broad money-price linkage
0
100
200 (2005 100)
20
0 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Monetary Framework in MyanmarMonetary Framework in MyanmarMore recently, there is still a close link between reserve money growth and inflation:y g
40%
45%
35%
40%
Reserve Money & Headline CPI (Y-o-Y Change in %)
30%
35%
40%
25%
30%
35%
15%
20%
25%
10%
15%
20% CPI (headline, 2010=100)
Reserve money (right axis)
0%
5%
10%
-5%
0%
5%
J J J J J J J J J J J J J
( g )
21
an-08
ul-08
an-09
ul-09
an-10
ul-10
an-11
ul-11
an-12
ul-12
an-13
ul-13
an-14
Inflation Targeting RegimeInflation Targeting Regime
Thank You!Thank You!
In the next lecture, you are going to hear more about reserve money and the CBMmore about reserve money and the CBM balance sheet.
