Frameworks for Monetary Stability : Policy Issues and Country Experiences

INTERNATIONAL MONETARY FUND

• Publisher: INTERNATIONAL MONETARY FUND
• Year: 1994
• ISBN:
  9781557754196

NONE

¹ There are also strong reasons to believe that exchange rate instability involves real costs in terms of distortion of trade and investment patterns, although the empirical evidence in this area is less definite (International Monetary Fund, 1986).

² This conclusion seems to be supported by the recent experience of the ERM countries that devalued their currencies during 1992–93 without any revival of inflationary pressures.

³ Central bank independence is typically regulated by law. A less formal, but similar, alternative is to announce that monetary policy will be guided by specific inflation targets. A number of countries, including Canada, the United Kingdom, and New Zealand (see Chapter 3 in International Monetary Fund, 1993), have announced explicit inflation targets, an arrangement that is sometimes seen as an alternative to anchoring monetary policy to an intermediate target. The conduct of monetary policy under an inflation target is discussed in the paper by Charles Freedman.

⁴ This paper also points out that the existence of a link between central bank independence and price stability is far from being established. Assessing the existence of such a link is certainly difficult because “legal independence” is not an easily measurable variable In what is probably the most thorough analysis of this issue available, Cukierman, Webb, and Neyapti (1992) find that, in industrial countries, legal independence can indeed be associated with better inflation performance (and that the former causes the latter). However, they are unable to find a significant link between independence and inflation in developing countries.

⁵ No other intermediate target was chosen to replace it.

⁶ A recent Fund paper discusses the case of countries in Central and Eastern Europe. See Baliño, Dhawan, and Sundararajan (1994).

¹ I have analyzed the issues connected with the periodic moves from rules to discretion in a general economic policy context in Guitián (1992a). For other recent discussions of the subject in a national and an international context, see Crockett (1993) and Giovannini (1993), respectively.

² There are a variety of levels at which the fundamental objective of monetary policy can be formulated: financial stability, which encompasses the establishment and maintenance of sound conditions in the financial sector; monetary stability which focuses on the soundness of conditions in the banking sector; and domestic price stability, which focuses on the maintenance and safeguard of the internal value of money; see, for further elaboration. Manuel Guitián (1994). There is, in addition, exchange rate stability, which concerns the protection and maintenance of the external value of money: see Cottarelli (1994).

³ These variables are often referred to as intermediate targets. I am not persuaded that “target” is the right term to apply to them, if only because the term conveys the notion of “objective.” It is true that, in a sense, intermediate variables have characteristics common to policy objectives themselves (after all, they are the variables to which proximate policy instruments are aimed); but, more importantly, they also conform closely to the concept of policy instruments (indeed, their relevance is derived from the role they play in the attainment of ultimate policy objectives). Emphasis on this latter aspect of intermediate variables would lead to classifying them as policy instruments; see Guitián (1973 and 1993a): see also Alexander and Caramazza (1994).

⁴ Much of the impulse behind these analyses came from research conducted at the University of Chicago: see, in particular, Friedman (1956). But over time, this impulse gained general acceptance and the basic principles derived tram these analyses became influential factors in policy implementation. At present, though, serious challenges to these principles have emerged: see, in particular, the discussion on challenges to monetary policy below.

⁵ There is an ample body of technical literature examining the rules-versus-discretion debate from the standpoint of the design of an optimal monetary policy discussing these imperfections. See, for example, Englander (1990) and the references listed therein.

⁶ The issue of the lags in the effects of policy was stressed long ago by Friedman (1948). For a discussion of time-consistency, see Kydland and Prescott (1977).

⁷ In the extreme, the predictability of policy rules will depend on how rigidly they are followed. In Simons’ words. “…we obviously need highly definite and stable rules of the game, especially as to money.... Once established, however, they should work mechanically, with the chips falling where they may” (1948, p. 169).

⁸ For further elaboration, see “The Quantity Theory of Money—A Restatement” in Friedman (1956); see also, Friedman (1969).

⁹ The view of monetary policy as an ineffective economic tool reflected early post-World War II concerns about the prospect of secular stagnation. The shift in policy from interest rate pegging to an active stance is well illustrated in the U.S. experience of the early 1950s, and in particular, by the Treasury-Federal Reserve Accord, under the terms of which the latter abandoned its policy of fixing the price of government securities (that is, interest rates). For elaboration, see Lutz (1961) and Friedman and Schwartz (1963).

¹⁰ Until the last stage, the evolution was paradoxical in that in the early period, national monetary policy discretion was prevalent, and yet the international system was rule-based (the Bretton Woods par value regime). In contrast, when national monetary policies moved toward rules, the move was accompanied by a shift to a discretionary syst...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Contents
• Foreword
• Preface
• Introduction
• I The Choice of Monetary Regime
• II Flexible Exchange Rates, Domestic Anchors, and Discretion
• III The Exchange Rate as Nominal Anchor
• IV Commodity Standards
• V Central Bank Independence
• VI Capital Movements
• VII Techniques of Monetary Control: Intermediate Targets, Instruments and Indicators
• VIII Public Debt Management and Monetary Policy
• IX Monetary Policy and Financial Structure
• Background Papers
• Footnotes