IMF高級宏觀經(jīng)濟(jì)學(xué)研修班課程CT1405MMF-L02Moneta課件

L-2.MonetaryandExchangeRatePolicyFrameworksandStrategiesPresenterRayBrooksJointChina-IMFTrainingProgramCourseonMacroeconomicManagementandFinancialSectorIssuesCT14.05L-2.MonetaryandExchangeRatOutlineWhataretheultimategoalsofmonetarypolicy?Whatarethealternativeframeworksandhowdotheywork?Howtochooseamonetaryframework?Whatchoicesweremadeinthepast?Howwelldidtheyperform?China’schoices2ThistrainingmaterialisthepropertyoftheInternationalMonetaryFund(IMF)andisintendedforuseinIMF’sInstituteforCapacitydevelopment(ICD)courses.AnyreuserequiresthepermissionofICD.OutlineWhataretheultimategI.Whataretheultimategoalsofmonetarypolicy?1. Pricestability2. Outputandemployment3.Exchangeratestability4.Postglobalcrisis,callstoalsotargetfinancialstability3I.WhataretheultimategoalsSources:OrganizationforEconomicCooperationandDevelopment;andIMFstaffcalculations(April2013WEO).Note:EachsquarerepresentstheaverageacrossadvancedeconomiesofinflationandcyclicalunemploymentinonequarterTherelationshipbetweeninflationandcyclicalunemploymenthaschangedovertimeSources:OrganizationforEconApparentthattheslopeofPhillipscurvehasfallenJV13.13.5Source:April2013WEOApparentthattheslopeofPhiWhatcanmonetarypolicydo?Caneffectivelycontrolpricesandexchangerates–nominalvariablesCanserveasanominalanchorintheeconomyCancontributetoeconomicgrowthandhelpcreatejobsthroughlowandstableinflationButitcannotbearealanchorunemployment,growth,andrealexchangeratecannotbeaffectedpersistently6JV13.13.Whatcanmonetarypolicydo?CaMonetarypolicyaffectsdemand,notsupplyToomuchdemandstimulusstokesinflationStabilizeoutputarounditspotentialandinflationaroundtheinflationtargetJointlyminimizevolatilityofoutputandinflation[sy;sp]7QuantityPriceADASLong-runASJV13.13.MonetarypolicyaffectsdemandExchangeRatePolicy:OverviewIntheshortrun,thenominalERlevelaffectstherealexchangerate:Ifdomesticinflationishigh,afixedexchangeratemightappreciatetheRER.“Therealexchangerateisalwaysflexible”AnappreciatedRERaffectscompetitivenessofexportsandcanleadtocurrentaccountdeficits.AflexibleERmightbeapowerfultooltorestoreexternalequilibrium.8ExchangeRatePolicy:OvervieII.WhataretheAlternativeMonetaryandExchangerateFrameworksandhowdotheywork?“Therearemanywaystoskinacat”StoneandBhundiaclassification9JV13.13.II.WhataretheAlternativeM10CompatiblechoicesCountriesneedtochooseamonetarypolicystrategy(e.g.,moneygrowthtargetsorinflationtargets)andanexchangeratearrangementThetwochoicesmustbecompatibleJV13.13.10CompatiblechoicesCountriesTheImpossibleTrinity11

CAPITALCONTROLSMonetaryindependenceHardPegPUREFLOATCapitalMobilityincreasingcapitalmobilityExchangeratestabilityChinaU.S.,JapanEUTheImpossibleTrinity11CAPIT12The“impossibletrinity”Itisimpossibletosimultaneouslymaintain:afixedexchangerateand autonomousmonetarypolicytopursuegoalsfordomesticeconomicactivityandpricestabilityiftheeconomyreliesonalargevolumeofpotentiallyvolatileandinternationallymobilesourcesoffinanceJV13.13.12The“impossibletrinity”ItiFourViableAlternativeMonetaryandExchangeRateRegimesExchangeratetargetingMonetaryaggregatestargetingInflationtargetingOther“eclectic”frameworks13JV13.13.FourViableAlternativeMoneta14

HARDPEGSExchangearrangementswithnoseparatelegaltenderCurrencyunionDollarizationCurrencyboard

INTERMEDIATE(SoftPegs)ConventionalpegStabilizedarrangementPegwithhorizontalbandsCrawlingpegCrawl-likearrangement

FLOATINGFloatingFreefloatingRangeofOptionsforExchangeRate14HARDPEGSINTERMEDIATEF1.ExchangeratetargetingTheexchangerateisthenominalanchorPre-World-War-IgoldstandardBretton-Woodsregime(1945-71)AllcountriespeggingtogoldthroughtheU.S.dollarArgentina’scurrencyboard(1991-2001)“Hard”pegDollarpeginSouthKorea,Thailand,Indonesia“Soft”pegWestAfricaMonetaryUnion,EuropeanMonetaryUnion(regionalsystem)15JV13.13.1.ExchangeratetargetingTheHowdoesERtargetingwork?KeeptheERontarget(level,“crawl”,andsoon)Aslongasthecapitalaccountisatleastpartlyopen,domesticinterestrate≈worldinterestrate+riskpremiumThe“l(fā)awofoneprice”(PPP)willtakecareofinflationconvergence(dz=p*-p)MaintainliquidityinthebankingsystemIt’sacomparativelysimpleregimetooperate!16JV13.13.HowdoesERtargetingwork?Kee“Thedevilisinthedetail”Acountrymaysaythattheyaremaintainingacrawlingpeg/managedfloat/freefloat,but:HavenovolatilityoftheexchangerateWhileofficiallyfloating,somecentralbanksusedtophonecommercialbankwith“suggested”ERsAccumulateinternationalreservesDistinguishdejureanddefactoregimes!ChinaisdejuremanagedfloatingarrangementButdefactoclassifiedasa“crawl-likearrangement”byIMFin2013ArticleIV(astheRMB-U.S.$ratehasremainedina2percentcrawlingband)17JV13.13.“Thedevilisinthedetail”AChina’spegwasstableagainstUS$mid-1990stomid2000sbutnominaleffectiveexchangeratemovedJV13.13.18Sources:InternationalFinancialStatisticsdatabaseChina’spegwasstableagainstChina’srealeffectiveexchangeratehasappreciatedmorethanthenominalrateJV13.13.19Sources:InternationalFinancialStatisticsdatabaseChina’srealeffectiveexchang2.MonetaryaggregatestargetingMonetarygrowthisthenominalanchor.Basedonthequantitytheoryofmoney(Friedman,1956):MV=PYInflationfrom“manydollarsbehindfewgoods.”Monetarypolicyinstrumentsadjustedtotargetgrowthrateofmoneysupply(e.g.,broadmoney)20JV13.13.2.Monetaryaggregatestargeti2.MonetaryaggregatestargetingTheexchangeratehastofloataslongasthecapitalaccountisopenThefiscalpositionmustbeundercontrol.Why?M2=NFA+NDA.Examples:Industrialcountries(thelate-1970stomid-1980s)About30countriestoday(mostlylow-income)InspiredtheECB’sMonetaryPillar.21JV13.13.2.MonetaryaggregatestargetiHowdoesMTwork?221.Provideliquidityconsistentwithyour…2.…intermediatetarget(M2growth)…3.…toachieveyourultimateobjective(p*)Needtobelieveinp=f(M)JV13.13.HowdoesMTwork?221.Provide3.InflationtargetingInflationforecastisthenominalanchorAdjustmonetarypolicyinstrumentstokeepthecentralbank’sforecastofinflationconsistentwithapre-announcedtargetExamples:NewZealand,Chile,U.K.,CzechRepublic,Poland,Romania,Thailand,Brazil,Ghana...23JV13.13.3.InflationtargetingInflati24Istheforecastofinflationontarget?YesShouldpolicyrespond?NochangeininstrumentDeterminesizeofresponseNoNochangeininstrumentYesNoChangeinstrument“Escapeclauses”permitdeparturefromthetargetCommunicateCommunicateCommunicateHowdoesITwork?24Istheforecastofinflation4.EclecticmonetarypolicyWhatisthenominalanchor?Adjustmonetarypolicyinstrumentstopursuestableeconomicgrowthandlowinflation,butwithnoformallypre-announcedtargetsExamples:U.S.,EuroArea,Japan,India,...25JV13.13.4.EclecticmonetarypolicyWhHowdoeseclecticpolicywork?Centralbankshaveinflationobjectives,butnotasexplicitontargetandhorizonasformalITcountriesECB:“inflationbelow,butcloseto,2

percent”Fed:“…thegoalsofmaximumemployment,stableprices,andmoderatelong-terminterestrates”.DecisionsarealsobasedonforecastsofinflationGoodsystemtoforecastinflationandagoodunderstandingofthetransmissionmechanismiscrucialDifferencebetweenITsand“eclectics”isadifferentlevelofcommunication,althoughconvergence.26JV13.13.Howdoeseclecticpolicywork?Group(Breakintogroupsof5-6todiscussquestionbelow.Nominateonepersonfromyourgroupwhowillsummarizethediscussion)WhatarethekeyfactorsbehindChina’schoiceofmonetaryandexchangerateframeworkinrecentyears?27Group(Breakintogroupsof5-III.Howtochooseamonetaryframework

Therearealwaysprosandcons28JV13.13.III.Howtochooseamonetary29Whatistheappropriatemonetaryandexchangeratepolicyregime?ManyconsiderationsarerelevantSimilarcountriessometimesmakedifferentchoicesThebestchoiceforanyparticularcountrymaychangeovertime

JV13.13.29WhatistheappropriatemoneChoiceofmonetaryframeworkEachmonetaryframeworkhasitsadvantagesanddisadvantages.Thechoicedependsonpolicyobjectivesandtheirrelativeimportance:Reduce/stabilizeinflationStabilizeoutputfluctuationsU.S.:“maximumsustainableemploymentandlowinflation”Avoidfinancialcrises(financialstability)Internationalorregionaleconomicintegration30JV13.13.ChoiceofmonetaryframeworkEa1.ExchangeratetargetingProvidedtheauthoritieshaveaclearcommitmenttoERstability,expectationsofinflationwillstabilizeShort-rundeviationsareinevitableAlonglistofrisks31JV13.13.1.ExchangeratetargetingProvRisksofexchangeratetargetingFiscaldominanceunderminestheregimeThepegcurrencymaynotbeconsistentwithtradepatterns(ex.ArgentineanandBrazilianpegstotheU.S.$inthe1990sandsubsequentexits)PegsencouragebuildupofbalancesheetvulnerabilitiesPrivatesector—usedtostableexchangerate—ignoresexchangeraterisk(plusbailoutexpectations)Buildupinforeigncurrencydebt(Asiancrisis,HungaryandRomanialately)32JV13.13.RisksofexchangeratetargetiChina’sCurrentAccountSurplushasfalleninrecentyearsandREERhasappreciated33Sources:InternationalFinancialStatisticsdatabaseChina’sCurrentAccountSurpluImpossibletrinityagainLossofmonetarypolicyasastabilizationtoolWithinternationalcapitalmobility,impossibletotargetexchangerateandusemonetarypolicyforoutputstabilizationButthelossofindependentmonetarypolicymaybeoffsetbybenefitsofregionalintegratione.g.Euroarea,WAEMUEliminatingexchangeraterisklowerstransactionscostsandincreasestrade34JV13.13.ImpossibletrinityagainLossoBottomlineonERtargetingSimpletooperate“Gainsfromtrade”canhelp“import”lowinflationFiscaldominanceNeedtofindtherightpegcurrency(orbasket)LossofmonetarypolicyasastabilizationtoolHigherriskofspeculativeattacksandcrisesFinancialsectorvulnerabilitiesasprivatesectortakesonexchangerateriskCostsofsterilizationforcentralbanks35JV13.13.BottomlineonERtargetingSimaJV13.13.36Source:AndrewCheng,2013PBCConferenceonCapitalFlowsaJV13.13.36Source:AndrewChe2.MonetaryAggregatestargetingFormonetarytargetingtoachievepricestability,theremustbeastablerelationshipbetweenmonetaryaggregatesandinflationInmanycountries,thishasbrokendownovertheyearsbecauseoffinancialinnovations……makingvelocityunstableanddifficulttoforecast.Monetarytargetinghaslostmuchofitsappeal37JV13.13.2.MonetaryAggregatestargetiVelocityofM2wasunstablein70sand80s,esp.inGermanyandJapanJV13.13.38Source:InternationalFinancialStatisticsVelocityofM2wasunstableinInChinatoo,thelinkbetweenmoneyandnominalGDPhasbeennotbeenstable39Sources:InternationalFinancialStatisticsdatabaseInChinatoo,thelinkbetweenBottomlineonmonetarytargetingOperationalsimplicityandtheoreticallysound……buttheregimeisnotintuitiveThepublicdoesnotunderstandwhatis“broadmoney”,“narrowmoney”,etc…EmpiricallydubiousTheshort-runmoney-to-inflationnexusdisappearedinthe1970sThecausalityfrommoneytooutput/pricesdoesnotholdinthedata40JV13.13.Bottomlineonmonetarytarget3.Flexibleexchangerate&

inflationtargetingExplicitinflationtargetandtransparentframework,mayhelpestablishcredibilityMonetarypolicyneedstobefreetopursuetheinflationobjectiveAsisotherframeworks,fiscaldominancewoulddamagethesystem;butperhapstoalesserdegreethaninERtargeting41JV13.13.3.Flexibleexchangerate&

iFlexibleERandITOperationallycomplex:needtoknowthewholemonetarytransmissionRequiresaworkinglinkfrompolicyratesinterbankrateslongratesWithnoERanchor,thenominalERcanbevolatile(“fearoffloatingsyndrome”)WithaweakERpass-through,therealERisalsovolatileshockstooutputEmphasisonpricestabilitymaycloudotherCBresponsibilities(financialstability)42JV13.13.FlexibleERandITOperationallNeedtoLearntoFloatFearoffloatingexchangerateisabarriertomanyemergingmarketsinadoptingITVoluntarytransition—priortothetransition,countriestendtohave:strongerbankingsupervision,includingtoreducecurrencymismatchesonbalancesheetsmoredevelopedsecuritiesmarkets;increasedcentralbankindependence,withemphasisonpricestabilitythenadoptinflationtargeting.Crisis-driventransition—afterthetransition,countriesimprovebankingsupervisionanddevelopsecuritiesmarkets.43NeedtoLearntoFloatFearofLessonsfromThreeCasesNewZealandCredibilityprobleminitiallyStartedwithstrictapproachBecamemoreflexibleovertime,asinflationexpectationsbecameanchoredChileandIsraelwereabletouseinflationtargetingtodisinflatesuccessfullyIsraelshowedthatcanadoptinflationtargettingevenwithoutmeetingpreconditions44LessonsfromThreeCasesNewZe45BottomlineoninflationtargetingA“nominalanchor”withoutaERcommitmentMonetarypolicyretainsindependencyunderfullcapitalmobilityFosterstransparencyandaccountabilityTechnicallydemandingFocusonpricestabilitymaybeattheexpenseofotherobjectives“Fearoffloating”considerationsJV13.13.45BottomlineoninflationtarOnelessonfromtheGreatRecession:centralbanksmustdomorethanjusttargetinflation46JV13.13.OnelessonfromtheGreatReceIsInflationTargetingDead?Oldview:Monetarypolicyshouldaimforalowandstableinflationrate.Newview:Stableinflationisnecessarybutnotsufficientformacroeconomicstability.Monetarypolicyshouldreactmorestronglytoindicatorsotherthanoutputandinflationtomitigatedamagingassetpriceboom-bustcycles.Lowinflationlimitsthescopeofmonetarypolicyindeflationaryrecessions.Raisetheinflationtarget?About2/3sofITcentralbankscurrentlytargetheadlineinflationoverthemedium-termoflessthan3percent47IsInflationTargetingDead?Ol4.Flexibleexchangerate

&eclecticmonetarypolicyNoexplicitcommitmenttoa“nominalanchor’’,suchasexchangerate,money,orinfaltion-LotsofdiscretionItmayworkiftheCentralBankalreadyhasalotofcredibility(Fed,SwissNationalBank)Itmaynotworktoachievedisinflation48JV13.13.4.Flexibleexchangerate

&eIV.WhatChoicesweremadeinthePAst49JV13.13.IV.WhatChoicesweremadeinBretton-Woodsera

(1946-1971)FixedexchangeratescurrenciespeggedtotheU.S.dollar&U.S.dollarpeggedtogoldStabilizingthedomesticeconomywasaprimaryobjectiveofmonetarypolicyControlsoninternationalcapitalflows1950sto1970swasaperiodoffinancialrepressioninadvancedcountries50JV13.13.Bretton-Woodsera

(1946-1971)Industrialcountriesafter1971EuropeancountrieswentfrompegsnarrowbandswidebandsacommoncurrencyOtherindustrialcountriesadoptedmonetaryaggregatetargetsinthelate1970sorearly1980sbutabandonedthemafewyearslaterMostofnon-euroindustrialcountrieshaveadoptedformalinflationtargets(Australia,Canada,Iceland,NewZealand,Norway,Sweden,UnitedKingdom)Alsomorethan20emergingmarketcountries51JV13.13.Industrialcountriesafter197MonetaryPolicyFramework(2000)Source:IMFAnnualReportonExchangeArrangementsandExchangeRestrictions(AREAER),2001Note:Themonetaryaggregatetargetcategoryincludescountriesthatadoptmonetaryaggregatetargetframeworkinadditiontofundsupportedorothermonetarycountries,andalsocountriesthatonlyadoptfundsupportedorothermonetaryprograms.ExchangerateanchorandInflation-targetingframeworkcategoriesincludecountriesthatalsoadoptfundsupportedorothermonetaryinadditiontotheirrespectiveframeworkprogram(morethanonenominalanchor).MonetaryPolicyFramework(200MonetaryPolicyFramework(2011)Source:IMFAnnualReportonExchangeArrangementsandExchangeRestrictions(AREAER),2012MonetaryPolicyFramework(201EvolutionofmonetaryregimesEvolutionofmonetaryregimesThereissomedefactobi-polarity…AdvancedCountries:ExchangeRateRegimes,1991,1999,2006(Fischer,2008),and201255JV13.13.Source:2012advancecountrieslistisfromWorldEconomicOutlook,April2013Thereissomedefactobi-polaThereissomedefactobi-polarity(2)…EmergingMarketCountries:ExchangeRateRegimes,1991,1999,2006,and201256JV13.13.Source:EmergingmarketsisSPRdepartmentofficiallist

Thereissomedefactobi-polaIV.Howwelldidtheyperform?57JV13.13.IV.Howwelldidtheyperform?58StoneandBhundia,2004,“ANewTaxonomyofMonetaryRegimes,”AnnualAverageCPIInflation,1990-2003JV13.13.58StoneandBhundia,2004,“AJV13.13.59JV13.13.59Continuewiththeexchangerateanchor(classifiedbyIMFascrawl-likearrangement)Introduceformalmonetarytargeting?Movetomoreexplicitinflation,growth,andfinancialstabilityobjectives?Adoptformalinflationtargeting?JV13.13.60V.China’sMonetaryandExchangeRateReformoptions

Continuewiththeexchangerat

JV13.13.61Continuingtowidentheexchangeratebandwouldrequireanewnominalanchor

JV13.13.61ContinuingtowideGroupJV13.13.62(5minutediscussionandreportback)WhatisthebestalternativenominalanchortotheroleplayedbytheexchangerateforChina?MonetarytargetingInflationtargetingEclecticpolicy—inflationandemployment/outputgoalsGroupJV13.13.62(5minutediscSummaryFourmonetaryandexchangerateregimesExchangeratetargetMonetaryaggregatetargetInflationtargetingwithflexibleexchangerateEclecticframeworkEachregimehasprosandconmonetarypolicyneedstobecompatiblewithexchangeratepolicyImpossibletrinitylimitsoptionsThechoiceoftheregimedependsonthecountry’ssituationNoonesizefitsall63SummaryFourmonetaryandexchaL-2.MonetaryandExchangeRatePolicyFrameworksandStrategiesPresenterRayBrooksJointChina-IMFTrainingProgramCourseonMacroeconomicManagementandFinancialSectorIssuesCT14.05L-2.MonetaryandExchangeRatOutlineWhataretheultimategoalsofmonetarypolicy?Whatarethealternativeframeworksandhowdotheywork?Howtochooseamonetaryframework?Whatchoicesweremadeinthepast?Howwelldidtheyperform?China’schoices65ThistrainingmaterialisthepropertyoftheInternationalMonetaryFund(IMF)andisintendedforuseinIMF’sInstituteforCapacitydevelopment(ICD)courses.AnyreuserequiresthepermissionofICD.OutlineWhataretheultimategI.Whataretheultimategoalsofmonetarypolicy?1. Pricestability2. Outputandemployment3.Exchangeratestability4.Postglobalcrisis,callstoalsotargetfinancialstability66I.WhataretheultimategoalsSources:OrganizationforEconomicCooperationandDevelopment;andIMFstaffcalculations(April2013WEO).Note:EachsquarerepresentstheaverageacrossadvancedeconomiesofinflationandcyclicalunemploymentinonequarterTherelationshipbetweeninflationandcyclicalunemploymenthaschangedovertimeSources:OrganizationforEconApparentthattheslopeofPhillipscurvehasfallenJV13.13.68Source:April2013WEOApparentthattheslopeofPhiWhatcanmonetarypolicydo?Caneffectivelycontrolpricesandexchangerates–nominalvariablesCanserveasanominalanchorintheeconomyCancontributetoeconomicgrowthandhelpcreatejobsthroughlowandstableinflationButitcannotbearealanchorunemployment,growth,andrealexchangeratecannotbeaffectedpersistently69JV13.13.Whatcanmonetarypolicydo?CaMonetarypolicyaffectsdemand,notsupplyToomuchdemandstimulusstokesinflationStabilizeoutputarounditspotentialandinflationaroundtheinflationtargetJointlyminimizevolatilityofoutputandinflation[sy;sp]70QuantityPriceADASLong-runASJV13.13.MonetarypolicyaffectsdemandExchangeRatePolicy:OverviewIntheshortrun,thenominalERlevelaffectstherealexchangerate:Ifdomesticinflationishigh,afixedexchangeratemightappreciatetheRER.“Therealexchangerateisalwaysflexible”AnappreciatedRERaffectscompetitivenessofexportsandcanleadtocurrentaccountdeficits.AflexibleERmightbeapowerfultooltorestoreexternalequilibrium.71ExchangeRatePolicy:OvervieII.WhataretheAlternativeMonetaryandExchangerateFrameworksandhowdotheywork?“Therearemanywaystoskinacat”StoneandBhundiaclassification72JV13.13.II.WhataretheAlternativeM73CompatiblechoicesCountriesneedtochooseamonetarypolicystrategy(e.g.,moneygrowthtargetsorinflationtargets)andanexchangeratearrangementThetwochoicesmustbecompatibleJV13.13.10CompatiblechoicesCountriesTheImpossibleTrinity74

CAPITALCONTROLSMonetaryindependenceHardPegPUREFLOATCapitalMobilityincreasingcapitalmobilityExchangeratestabilityChinaU.S.,JapanEUTheImpossibleTrinity11CAPIT75The“impossibletrinity”Itisimpossibletosimultaneouslymaintain:afixedexchangerateand autonomousmonetarypolicytopursuegoalsfordomesticeconomicactivityandpricestabilityiftheeconomyreliesonalargevolumeofpotentiallyvolatileandinternationallymobilesourcesoffinanceJV13.13.12The“impossibletrinity”ItiFourViableAlternativeMonetaryandExchangeRateRegimesExchangeratetargetingMonetaryaggregatestargetingInflationtargetingOther“eclectic”frameworks76JV13.13.FourViableAlternativeMoneta77

HARDPEGSExchangearrangementswithnoseparatelegaltenderCurrencyunionDollarizationCurrencyboard

INTERMEDIATE(SoftPegs)ConventionalpegStabilizedarrangementPegwithhorizontalbandsCrawlingpegCrawl-likearrangement

FLOATINGFloatingFreefloatingRangeofOptionsforExchangeRate14HARDPEGSINTERMEDIATEF1.ExchangeratetargetingTheexchangerateisthenominalanchorPre-World-War-IgoldstandardBretton-Woodsregime(1945-71)AllcountriespeggingtogoldthroughtheU.S.dollarArgentina’scurrencyboard(1991-2001)“Hard”pegDollarpeginSouthKorea,Thailand,Indonesia“Soft”pegWestAfricaMonetaryUnion,EuropeanMonetaryUnion(regionalsystem)78JV13.13.1.ExchangeratetargetingTheHowdoesERtargetingwork?KeeptheERontarget(level,“crawl”,andsoon)Aslongasthecapitalaccountisatleastpartlyopen,domesticinterestrate≈worldinterestrate+riskpremiumThe“l(fā)awofoneprice”(PPP)willtakecareofinflationconvergence(dz=p*-p)MaintainliquidityinthebankingsystemIt’sacomparativelysimpleregimetooperate!79JV13.13.HowdoesERtargetingwork?Kee“Thedevilisinthedetail”Acountrymaysaythattheyaremaintainingacrawlingpeg/managedfloat/freefloat,but:HavenovolatilityoftheexchangerateWhileofficiallyfloating,somecentralbanksusedtophonecommercialbankwith“suggested”ERsAccumulateinternationalreservesDistinguishdejureanddefactoregimes!ChinaisdejuremanagedfloatingarrangementButdefactoclassifiedasa“crawl-likearrangement”byIMFin2013ArticleIV(astheRMB-U.S.$ratehasremainedina2percentcrawlingband)80JV13.13.“Thedevilisinthedetail”AChina’spegwasstableagainstUS$mid-1990stomid2000sbutnominaleffectiveexchangeratemovedJV13.13.81Sources:InternationalFinancialStatisticsdatabaseChina’spegwasstableagainstChina’srealeffectiveexchangeratehasappreciatedmorethanthenominalrateJV13.13.82Sources:InternationalFinancialStatisticsdatabaseChina’srealeffectiveexchang2.MonetaryaggregatestargetingMonetarygrowthisthenominalanchor.Basedonthequantitytheoryofmoney(Friedman,1956):MV=PYInflationfrom“manydollarsbehindfewgoods.”Monetarypolicyinstrumentsadjustedtotargetgrowthrateofmoneysupply(e.g.,broadmoney)83JV13.13.2.Monetaryaggregatestargeti2.MonetaryaggregatestargetingTheexchangeratehastofloataslongasthecapitalaccountisopenThefiscalpositionmustbeundercontrol.Why?M2=NFA+NDA.Examples:Industrialcountries(thelate-1970stomid-1980s)About30countriestoday(mostlylow-income)InspiredtheECB’sMonetaryPillar.84JV13.13.2.MonetaryaggregatestargetiHowdoesMTwork?851.Provideliquidityconsistentwithyour…2.…intermediatetarget(M2growth)…3.…toachieveyourultimateobjective(p*)Needtobelieveinp=f(M)JV13.13.HowdoesMTwork?221.Provide3.InflationtargetingInflationforecastisthenominalanchorAdjustmonetarypolicyinstrumentstokeepthecentralbank’sforecastofinflationconsistentwithapre-announcedtargetExamples:NewZealand,Chile,U.K.,CzechRepublic,Poland,Romania,Thailand,Brazil,Ghana...86JV13.13.3.InflationtargetingInflati87Istheforecastofinflationontarget?YesShouldpolicyrespond?NochangeininstrumentDeterminesizeofresponseNoNochangeininstrumentYesNoChangeinstrument“Escapeclauses”permitdeparturefromthetargetCommunicateCommunicateCommunicateHowdoesITwork?24Istheforecastofinflation4.EclecticmonetarypolicyWhatisthenominalanchor?Adjustmonetarypolicyinstrumentstopursuestableeconomicgrowthandlowinflation,butwithnoformallypre-announcedtargetsExamples:U.S.,EuroArea,Japan,India,...88JV13.13.4.EclecticmonetarypolicyWhHowdoeseclecticpolicywork?Centralbankshaveinflationobjectives,butnotasexplicitontargetandhorizonasformalITcountriesECB:“inflationbelow,butcloseto,2

percent”Fed:“…thegoalsofmaximumemployment,stableprice