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Macroeconomic Stability in the Aftermath of the Financial Crisis Julio Velarde Governor Central Reserve Bank of Peru CEMLA - SEACEN, Punta del Este, November 2012 1
Macroeconomic Stability in the Aftermath of the Financial Crisis
Julio Velarde Governor
Central Reserve Bank of Peru
CEMLA - SEACEN, Punta del Este, November 2012
1
Content
1. Benefits of macroeconomic stability 2. Monetary policy and macroeconomic
stability 3. Peru’s experience 4. Challenges for the years ahead
2
q Economic theory has associated macroeconomic stability with the following:
– (i) monetary stability, i.e., keeping inflation low and stable;
– (ii) financial stability, in particular acting as a lender of last resort to ensure adequate liquidity and a fluent functioning of the payments system;
– (iii) exchange rate stability and;
– (iv) output stability, keeping unemployment close to its natural rate.
q In the pre-crisis period, a growing number of independent central banks adopted monetary strategies aimed at preserving price stability with exchange rate flexibility while keeping an eye on output.
3
Benefits of macroeconomic stability
q The tenets of this framework based on price stability are uncontroversial :
– There is no permanent tradeoff between inflation and unemployment.
– High and volatile inflation depresses growth and distorts resource allocation.
– Inflation harms the poorest segments of society most, because they lack protection against its disruptive effects.
4
Benefits of macroeconomic stability
There is cross-country evidence in the growth literature that points to the importance of inflation for long-run economic performance…
5
Barro & Sala-i-Martin report a negative relationship between inflation and growth Easterly & Fisher (2000): “…direct measures of improvements in well-being of the poor… (are) negatively correlated with inflation.”
Benefits of macroeconomic stability
6
Several studies also point at macroeconomic stabilization as an important determinant of long-run performance: Loayza & Hnatkovska (2003): “…macroeconomic volatility and long-run economic growth are negatively related.”
Benefits of macroeconomic stability
But, the nature of macroeconomic policies used to obtain stability matters,
Aghion & Banerjee (2005): “…countercyclical budgetary policies are growth-enhacing in countries with a lower level of financial development.”
Fatás & Mihov (2011): “…it is not enough to attain low inflation and low budget deficits on average, it is also necessary to have stable inflation and stable fiscal policy.”
7
Policy volatility and growth (1970 – 2007)
Benefits of macroeconomic stability
Central Bank
Monetary Policy
Exchange Rate Policy
Macro-prudential
Policy
Macroeconomic Stability
- monetary
- financial
- exchange rate
- output
Long-run Growth
8
Monetary policy and macroeconomic stability
The Peruvian experience shows that macroeconomic volatility has been associated with lower output growth rates.
9
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
1960
19
61
1962
19
63
1964
19
65
1966
19
67
1968
19
69
1970
19
71
1972
19
73
1974
19
75
1976
19
77
1978
19
79
1980
19
81
1982
19
83
1984
19
85
1986
19
87
1988
19
89
1990
19
91
1992
19
93
1994
19
95
1996
19
97
1998
19
99
2000
20
01
2002
20
03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
Crecimiento del PBI y Volatilidad del Crecimiento del PBI (Promedio móvil 10 años)
Crecimiento del PBI Volatilidad del crecimiento
Nota: La volatilidad del crecimiento se calcula mediante la desviación estándar del crecimiento de los últimos 10 años.
Monetary policy and macroeconomic stability
During the 70s and 80s, periods of high macroeconomic and policy instability, per capita GDP in Peru decreased 52 per cent.
206
100
152
80
100
120
140
160
180
200
220
1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Per Capita GDP (1960 = 100)
Period GDP growth (average)
Per Capita GDP
60’ 5,9 3,2
70’ 3,6 0,6
80’ -1,0 -2,1
90’ 4,0 1,3
01’-11’ 5,8 4,5
10
Monetary policy and macroeconomic stability
Monetary policy in emerging economies has come a long way in the control of inflation in the last two decades. This, coupled with other factors, has fostered strong economic performance in the region.
11
Monetary policy and macroeconomic stability
- 6,0
- 4,0
-2,0
0,0
2,0
4,0
6,0
8,0
10,0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Real GDP (PPP) – Developed and Emerging Economies(% var)
Developed Economies Emerging and Developing Economies
12
Since the beginning of the 1990s, dollarization has been a significant concern to Peru’s monetary authorities in view of its potential risks to the financial system.
37,8
45,5
0
10
20
30
40
50
60
70
80
90
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Dollarization Ratio(%)
Broad money dollarization
Credit dollarization
Peru´s experience
Peru’s IT framework departs somewhat from international standards in that the BCRP uses other instruments in addition to policy interest rates, with an aim to reduce balance sheet effects associated with financial dollarization.
13
Peru´s experience
Additionally, high reserve requirements on foreign currency deposits contribute to: a) ensuring adequate liquidity; b) reducing pressure on bank credit; and c) internalizing dollarization risks. High reserve requirements on banks’ short-term foreign liabilities also reduce their exposure to “sudden stops”.
14
38,8
55,0
20
25
30
35
40
45
50
55
60
Ene-‐06
Abr-‐06
Jul-‐0
6
Oct-‐06
Ene-‐07
Abr-‐07
Jul-‐0
7
Oct-‐07
Ene-‐08
Abr-‐08
Jul-‐0
8
Oct-‐08
Ene-‐09
Abr-‐09
Jul-‐0
9
Oct-‐09
Ene-‐10
Abr-‐10
Jul-‐1
0
Oct-‐10
Ene-‐11
Abr-‐11
Jul-‐1
1
Oct-‐11
Ene-‐12
Abr-‐12
Jul-‐1
2
Foreign Currency Reserve Ratios(as percentage of total obligations subject to legal requirements)
Average rate
Marginal rate
%
Before 2008 crisis During
2008 crisis
After2008 crisis
31
17
82
45
70
84
81
0
10
20
30
40
50
60
70
80
90
100
0
2 000
4 000
6 000
8 000
10 000
12 000
14 000
Jan-‐07
Mar-‐07
May-‐07
Jul-‐0
7Sep-‐07
Nov-‐07
Jan-‐08
Mar-‐08
May-‐08
Jul-‐0
8Sep-‐08
Nov-‐08
Jan-‐09
Mar-‐09
May-‐09
Jul-‐0
9Sep-‐09
Nov-‐09
Jan-‐10
Mar-‐10
May-‐10
Jul-‐1
0Sep-‐10
Nov-‐10
Jan-‐11
Mar-‐11
May-‐11
Jul-‐1
1Sep-‐11
Nov-‐11
Jan-‐12
Mar-‐12
May-‐12
Jul-‐1
2
External Liabilitioes of banks entities (Balance in US$ million and ratio in percentage)
Long term external liabilities Short term external liabilities Long term external liabilities /Total external liabilities
The long term financing increased after the exoneration of reserve
requirement on long term external liabilities.
Peru´s experience
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FOREX intervention aims at reducing exchange rate volatility to prevent balance sheet effects, without any commitment on the exchange rate level.
-600
-400
-200
0
200
400
600
2,650
2,750
2,850
2,950
3,050
3,150
3,250
3,350D
ec-0
7Ja
n-0
8F
eb-0
8M
ar-0
8A
pr-0
8M
ay-0
8Ju
n-0
8Ju
l-08
Au
g-08
Oct
-08
Nov
-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Apr
-09
May
-09
Jun
-09
Jul-0
9A
ug-
09S
ep-0
9O
ct-0
9N
ov-0
9D
ec-0
9Ja
n-1
0F
eb-1
0M
ar-1
0A
pr-1
0M
ay-1
0Ju
n-1
0Ju
l-10
Aug
-10
Sep
-10
Oct
-10
Nov
-10
Dec
-10
Jan
-11
Feb
-11
Mar
-11
Apr
-11
May
-11
Jun
-11
Jul-1
1A
ug-
11S
ep-1
1
Net
FX
Pur
chas
es (m
illon
s of
US
dol
lars
)
Exc
hang
e ra
te (P
EN
per
US
dol
lar)
Nominal Exchange Rate and Net Forex Intervention
Net FX purchases CDR BCRP Exchange rate
US$ Millions Net Purchases
Net maturity of CDR-BCRP
Net placements of CDLD
Acummulated 2007 10 306 0 0Acummulated 2008 2 754 -1 421 0Acummulated 2009 108 1 421 0Acummulated 2010 8 963 0 160Acummulated Octuber 3, 2011 1 493 -590 -160Acummulated 2007 - 2011 23 624 -590 0
During the 2008 crisis
After the 2008 crisis
Peru´s experience
The growing size of the BCRP’s balance-sheet has been supported by a solid fiscal position, the use of reserve requirements and, to a lesser degree, the placement of BCRP securities.
Central Reserve Bank of Peru
Assets LiabilitiesInternational reserves 27,6 Public sector deposits 10,5
In domestic currency 6,7In foreign currency 3,8
Reserve requirements 7,6In domestic currency 2,6In foreign currency 5,0
Central Bank instruments 3,6Cash holdings 5,7Other liabilities 0,2
Peru: Central Reserve Bank Balance Sheet(As percentages of GDP. Figures of December 31, 2011)
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Peru´s experience
The BCRP’s Forex intervention has neither created real exchange rate misalignments nor prevented a sustained dedollarization process.
17
Multilateral Real Exchange Rate and Equilibrium Real Exchange rate (2009 = 100)
The estimation folows the BEER methodology with data until september 2012.
Peru´s experience
These policies have helped Peru attain sound macroeconomic outcomes.
102 79 254
- 1 190
4 671
'60 '70 '80 '90 01 - 11
Trade Balance (US$ millions)
9,5 32,6
369,5
24,6 2,5
60' 70' 80' 90' 00 - 11
Inflation : 1960 - 2011 ( percent change )
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Peru´s experience
q We have learned from the crisis that macroeconomic stability demands an array of policies in order to anticipate and cope with shocks originating from multiple sources.
q This requires both an institutional framework to establish the principles and instruments governing macro-regulation and a clear distinction between the roles of monetary and macro-regulatory policy.
q In the face of various potential sources of destabilizing shocks for the economy, central banks require a set of instruments wider than the standard monetary policy toolkit.
q Such instruments have the common objective of deterring economic agents from excessive risk taking and enhancing the resilience of the economy against low-probability but high-impact events.
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Challenges ahead
q Several central banks, especially in emerging market economies, have used instruments such as capital requirements, counter-cyclical provisioning, additional liquidity requirements, and debt limits to meet these objectives.
q However, the use of these instruments represents an important challenge to the authorities, as they typically impose efficiency costs on financial intermediation, which nevertheless are lower than the benefits from preserving financial stability.
q Shortcomings may be limited by using the right mix of instruments —especially distributing the burden of macro-prudential regulation among a wider set of tools.
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Challenges ahead
q It is fundamental to ensure adequate communication between the regulatory, supervisory, monetary and fiscal authorities to guarantee the effectiveness of macro-prudential policies.
q For central banks in particular, it is important to keep in mind that macro-prudential policies can and must be implemented while preserving the two pillars of monetary policy; i.e., independence and the single mandate to preserve monetary stability.
q Many challenges remain going forward. In particular, the limits between monetary and macro-prudential policy need to be further clarified; and additional work is required to identify areas where the complementarity between monetary and macro-prudential policies can be maximized.
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Challenges ahead
Macroeconomic Stability in the Aftermath of the Financial Crisis
Julio Velarde Governor
Central Reserve Bank of Peru
CEMLA - SEACEN, Punta del Este, November 2012
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