Introduction toIntroduction to
Introduction
toIntroduction
to
Monetar
y
Polic
y
Monetar
y
Polic
y
yyyy
Workshop for Staff of
Ministry of National Planning and Economic
Ministry
of
National
Planning
and
Economic
Development
Nay Pyi Taw, Myanmar
June 2 – 3
,
2014
,
Jan Gottschalk
TAOLAMTAOLAM
TAOLAMTAOLAM
IMF-TAOLAM training activities are supported by funding of the Government of Japan
OutlineOutline
I
CtlBkObjti
I
.
C
en
t
ra
l
B
an
k
Obj
ec
ti
ves
II
MtPliF k
II
.
M
one
t
ary
P
o
li
cy
F
ramewor
k
s
2
This 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
Keeping inflation under control
“…it was clearly understood that my task was to get
inflation above zero and below 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 currency
domestic
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
M
onetary
Stability
• Prudential policy
•
Supervision oversight
Financial
stability
•
Supervision
,
oversight
stability
•FX intervention
• FX reserve management
• Liquidity management
• Lender of last resort
Policy Operation
Functions
6
Central Bank Objectives: Central Bank Objectives:
Historical Ex
p
erience in M
y
anma
r
Historical Ex
p
erience in M
y
anma
r
pypy
60
Annual CPI Inflation Rates (1996-2013)
40
50
60
30
40
Developing
10
20
Developing
Asia
Myanmar
-10
0
7
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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 stability
preserve
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 Ob
j
ectives
j
II. Monetar
y
Polic
y
Frameworks
yy
9
Monetary Policy FrameworksMonetary Policy Frameworks
Central challenge for monetary policy frameworks:
Long gaps between policy decision and ultimate objective!
Policy
Decision
CtlBk
Long
gaps
between
policy
decision
and
ultimate
objective!
Decision
C
en
t
ra
l
B
an
k
Instruments
Operating
Target
Intermediate
Target
Target
Ultimate
Indicator
Variables
10
Objective
Role of TargetsRole of Targets
As a result of the long
l
transmission
l
ag
between central bank
instrument and ultimate
objective,
operating and
objective,
operating
and
intermediate targets are
needed
Target
:proximate
Target
:
proximate
goals, not objectives
in and of themselves;
work directly toward
achieving the long-
term objectives of
policy
11
Operating TargetsOperating Targets
Operating target:
il lh
tact
i
ca
l
goa
l
s t
h
at
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
•
Sh
ort-term
i
nterest 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
it dit t tththl
i
n
t
erme
di
a
t
e
t
arge
t
th
a
t
h
e
l
ps
to pin down inflationary
expectations
• The choice of an intermediate
target defines the monetary
policy framework
policy
framework
– Exchange rate anchor
Mt tt t
–
M
one
t
ary aggrega
t
e
t
arge
t
– Inflation targeting
14
Classification of Monetary FrameworksClassification of Monetary Frameworks
Exchange Rate Regimes
D
ollarization
or currency union
D
ollarization
or
currency
union
Currency board
Peg
d
Fixe
d
Horizontal bands
Crawlin
g
p
e
g
FIXED
gp g
Without bands
With bands
Floating
Floating
Managed
Independent
15
FLEXIBL
E
Exchange Rate Regime in Myanmar:Exchange Rate Regime in Myanmar:
Historical Pers
p
ectiveHistorical Pers
p
ective
•
Official rate was very stable
8
9
10
pp
Official
rate
was
very
stable
between 1950 and 2011—
but it was set by
government with no
3
4
5
6
7
relationship to economic
developments
0
1
2
9
50A1
9
53A1
9
56A1
9
59A1
9
62A1
9
65A1
9
68A1
9
71A1
9
74A1
9
77A1
9
80A1
9
83A1
9
86A1
9
89A1
9
92A1
9
95A1
9
98A1
0
01A1
0
04A1
0
07A1
0
10A1
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
1
9
2
0
2
0
2
0
2
0
• 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
:effectiveApril
daily
foreign
currency
auctions to determine
exchange rate
De
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
17
other managed
arrangement
Monetary Targeting RegimeMonetary Targeting Regime
Policy
Decision
Monetary
Operations
Operations
Reserve
Reserve
Money
Broad Money
Inflation
Broad
Money on
tk?
t
rac
k?
18
Monetary Framework in MyanmarMonetary Framework in Myanmar
Historicall
y
close link between broad mone
y
and
p
rices:
600
700
yyp
400
500
600
200
300
CPI (2005=100)
Broad money
(2005 100)
0
100
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
2
0
(2005
=
100)
0
01
0
02
0
03
0
04
0
05
0
06
0
07
0
08
0
09
0
10
0
11
0
12
19
Monetary Framework in MyanmarMonetary Framework in Myanmar
Historicall
y
, reserve mone
y
and broad mone
y
are also
yy y
closely 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 Myanmar
More recently, there is still a close link between reserve
mone
y
g
rowth and inflation:
yg
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
(
ri
g
ht 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 the interrelationships
more
about
the
interrelationships
between the different sectors.
