Introduction to

Monetary
y Policyy
Introductory Workshop to
Financial Programming and Policies
Yangon, Myanmar
January 19–23, 2015

Jan Gottschalk
TAOLAM

IMF-TAOLAM training activities are supported by funding of the Government of Japan

Outline

I Central
I. C t l Bank
B k Objectives
Obj ti

II Monetary
II. M t Policy
P li FFrameworks
k

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.
2
Central Bank Objectives: Inflation

“…it was clearly understood that my task was to get

i fl i above
inflation b zero and
dbbelow
l 2%2%.””
Don Brash, former RBNZ Governor
3
Central Bank Objectives: Foreign Exchange Stability

Avoiding large, sudden foreign exchange outflows!

• Shortage of
foreign exchange
can lead to loss of
confidence in
domestic currency
• Exchange rate
needs to be
competitive

4
Central Bank Objectives: Financial System Stability

Keeping the banking

system solvent!

Well-functioning
credit and payment
system

5
Central Bank Objectives & Functions

Monetary
M • Monetary policy
Stability • Exchange rate policy

Financial • Prudential policy

stability • Supervision,
Supervision oversight

• FX intervention
Policy Operation • FX reserve management
Functions • Liquidity management
• Lender of last resort

6
Central Bank Objectives:
Historical Experience
p in Myanmar
y
Annual CPI Inflation Rates (1996-2013)
60

50

40

30
Developing
20 Asia
10 Myanmar

-10
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013 7
Central Bank Objectives: CBM Law

CBM Law, Chapter II:

• The aim of the Central Bank shall be to maintain and
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
development
8
Outline

I. Central Bank Objectives

j

II. Monetaryy Policyy Frameworks

9
Monetary Policy Frameworks
Central challenge for monetary policy frameworks:
Long gaps between policy decision and ultimate objective!

Policy
Decision Central
C t lB Bank
k
Instruments

Operating
Target Intermediate
Target
Indicator
Variables Ultimate
Objective
10
Role of Targets

As a result of the long

transmission lag
l
between central bank
instrument and ultimate
objective, operating and
intermediate targets are
needed
Target: proximate
goals, not objectives
in and of themselves;
work directly toward
achieving the long-
term objectives of
policy

11
Operating Targets

Operating target:
tactical
i l goals
l that
h
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
• Short-term
Sh i
interest rates
(e.g., interbank rate (“federal
funds”) in the U.S.)

12
 Intermediate Targets

• Criteria for
intermediate targets
– Consistent with
ultimate goals
– Can be accurately
measured
– Timely
– Can be influenced by
the central bank

13
 Intermediate Targets as Nominal Anchor
• A ‘nominal anchor’ is an
i t
intermediate
di t ttargett th
thatt h
helps
l
to pin down inflationary
expectations
• The choice of an intermediate
target defines the monetary
policy framework
– Exchange rate anchor
– Monetary
M t aggregate
t target
t t
– Inflation targeting

14
Classification of Monetary Frameworks
Exchange Rate Regimes
 Dollarization or currency union
 Currency board
 Peg
Fixed
d
FIXED Horizontal bands
 Crawlingg p
pegg
Without bands
With bands
 Floating
Managed
Independent
FLEXIBLE
15
 Exchange Rate Regime in Myanmar:
Historical Perspective
p
10
9
• Official rate was very stable 8
7
between 1950 and 2011— 6
but it was set by 5
4
government with no 3
2
relationship to economic 1
developments 0

950A1
953A1
956A1
959A1
962A1
965A1
968A1
971A1
974A1
977A1
980A1
983A1
986A1
989A1
992A1
995A1
998A1
001A1
004A1
007A1
010A1
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
• In 2012, official rate was 1,400
1,200
allowed to float and 1,000
brought in line with 800
market rate 600
400
200
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: 2013
• April 2012: CBM started
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
other managed
arrangement
17
Monetary Targeting Regime

Policy
Decision Monetary
Operations

Reserve
Money Broad Money

Broad
Money on Inflation
t k?
track?

18
 Monetary Framework in Myanmar

Historicallyy close link between broad moneyy and prices:

p
700

600

500

400
CPI (2005=100)
300

200 Broad money

(2005 100)
(2005=100)
100

0
20

20

20

20

20

20

20

20

20

20

20

20
001

002

003

004

005

006

007

008

009

010

011

012
19
 Monetary Framework in Myanmar

Historically,
y reserve moneyy and broad moneyy are also
closely linked:
700

600
This opens possibility
500
Broad
for central bank to money
influence prices via 400 (2005 100)
(2005=100)

its control over 300 Reserve

reserve money and money
(2005=100)
(2005 100)
200
the broad money-
price linkage 100

0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
20
 Monetary Framework in Myanmar
More recently, there is still a close link between reserve
moneyy growth
g and inflation:
Reserve Money & Headline CPI (Y-o-Y Change in %)
40% 45%
35% 40%
30% 35%
25% 30%
20% 25%
CPI (headline,
15% 20% 2010=100)

10% 15% Reserve money

((right
g axis))
5% 10%
0% 5%
-5% 0%
Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Jan-14
Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

21
Inflation Targeting Regime
Thank You!

In the next lecture, you are going to hear

more about reserve money and the CBM
balance sheet.