1 monetary policy in east asia: does targeting inflation require ‘inflation targeting’? hans...
TRANSCRIPT
1
Monetary Policy in East Asia: Does Targeting Inflation Require
‘Inflation Targeting’?
Hans GenbergProfessor, Graduate Institute of International Studies, Geneva
Research Fellow, HKIMR
2
Outline
• Inflation and monetary policy in East Asia:‘If it isn’t broken, don’t fix it’
• Inflation targeting must not be a one-size-fit-all strategy
• Target inflation, yes - ‘inflation targeting’, maybe
• Some suggestions for research
3
East Asia does not have an ‘inflation problem’
Table 1. Inflation rates in selected countries, 1991-2000.
Average Standarddeviation
Australia 2.22 1.50New Zealand 1.75 1.06Singapore 1.73 1.18Korea 5.10 2.44Malaysia 3.55 1.09Thailand 4.54 2.28Hong KongSAR
5.35 5.39
Philippines 8.60 3.83
4
Chart1: Inflation rates
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
AUSTRALIA NEW ZEALAND SINGAPORE
5
Chart 2: Inflation rates
0
1
2
3
4
5
6
7
8
9
10
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
KOREA MALAYSIA THAILAND
6
Chart 3:Inflation rates
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
HONG KONG SAR PHILIPPINES
7
Is there a need to change strategy?
• Fear of pegging
• What are the objectives of monetary policy
• Need for a nominal anchor
8
What will countries do?
• New Zealand and Australia - No, but there is some talk of a monetary union
• Hong Kong - A basket peg? • Korea and Thailand - have adopted inflation
targeting. How will it be implemented?• Malaysia and Singapore - exchange-rate
based strategies• Philippines - inflation targeting as well?
9
Inflation Targeting
• Fundamentally about the objectives of monetary policy
and • How to achieve these objectives
• Countries differ - the implementation of inflation targeting in industrialized countries does not necessarily fit elsewhere
10
Targeting inflation vs. Inflation Targeting
• The need for a nominal anchor
• Monetary policy can not do it alone
• Inflation targeting can not mean targeting only inflation
• Implementation must be country specific
11
Alternative nominal anchors
• The exchange rate
• Monetary or credit aggregates
• An inflation target
12
The importance of policy consistency
• Large fiscal imbalances complicate inflation targeting – Deficit financing– Changes in the equilibrium real interest rate
• Agreement of what monetary policy can and cannot accomplish
• Central Bank independence is not enough – ‘The government giveth and the government taketh
away’
13
Objectives of monetary policy
• Strict inflation targeting (‘inflation nutters’)– Inflation – to provide a nominal anchor
• Flexible inflation targeting (inflation targeting does not mean targeting only inflation)– Inflation
– Output variability
– What about the exchange rate?
14
The exchange rate among the targets?
• Exchange-rate volatility and trade– Theory (ambiguous but presumption that higher
uncertainty would reduce trade). – Empirical evidence
• Time-series evidence does not show much effect
• Recent cross-section evidence finds stronger relationship
• Trade promotes welfare through increased incomes and growth
15
Implementation must be country specific
• The choice of goals
• The choice of intermediate target
• What should be the operating target?
• Inflation reports, communication with the public, central bank independence and all that
16
Some important areas for research
• Fixed rules are relatively easy to carry out
• Targeting inflation implies more discretion and responsibility for the central bank
• This requires more knowledge
17
The transmission mechanism
• The central bank must choose an operating procedure that allows it to control inflation while at the same time getting as close as possible to other subsidiary goals
• The transmission mechanism of monetary policy defines the policy strategy
18
Inflation
Output gap
Exchangerate
Interestrate
Monetary policyinstrument
?
‘Noise’
Alternative transmission mechanisms
19
Inflation
Output gap
Interestrate
Exchangerate
Monetary policyinstrument
?
‘Noise’
Alternative transmission mechanisms
20
Inflation
Output gapInterest
rate
Exchangerate
Monetary policyinstrument?
‘Noise’
‘Noise’
Alternative transmission mechanisms
21
Should the interest rate or the exchange rate be the residual?
• What constitutes a neutral monetary policy?
• Vulnerability of the economy to interest rate vs exchange rate volatility
• Sources of chocks and nature of financial relationships in the economy
22
Is there a need for international policy co-ordination?
• Independent inflation targeting means greater exchange rate volatility
• The risk of competitive depreciations/appreciations
23
Three parting reminders
• Inflation targeting is about goals of monetary policy– It does not imply that there is only one goal
• Implementation of monetary policy has to be country specific– IT is consistent with many different approaches
• Knowledge of the transmission of monetary policy will become more important
