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Comments: “Inflation Targeting Framework for Jamaica: An Empirical Exploration” PowerPoint PPT Presentation

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Comments: “Inflation Targeting Framework for Jamaica: An Empirical Exploration”. Myriam Quispe-Agnoli Federal Reserve Bank of Atlanta Conference on Inflation Targeting October 4 –5, 2004. Objective of the paper.

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Comments: “Inflation Targeting Framework for Jamaica: An Empirical Exploration”

Myriam Quispe-Agnoli

Federal Reserve Bank of Atlanta

Conference on Inflation Targeting

October 4 –5, 2004

Objective of the paper

  • Is inflation targeting (IT) an effective framework for monetary policy in Jamaica?

Paper Structure

  • Monetary Policy in Jamaica since 1990.

  • Literature review comparing the IT experience of developed and developing countries.

  • Review of the fundamental requirements for IT in Jamaica.

  • Discusses the implementation of IT in Jamaica.

Comments’ Outline

  • I will follow the outline of the paper for my comments:

    • First, I will look at the preconditions for inflation targeting (IT) followed by questions on specific topics

    • Second, I will discuss the some issues on IT design and implementation

    • Finally, I will bring general questions

Suggested list of preconditions before adopting IT

  • Central bank independence (CBI).

  • Macroeconomic stability.

  • Financial system stability.

  • Other institutional elements.

Preconditions for IT in Jamaica

  • Does the Central Bank have a reasonable degree of operational independence to ensure flexibility in monetary policy towards achieving the inflation target?

    Central Bank is independent but…

  • There is no law that prohibits public financing

  • Political independence is limited by the presence of government representatives on the board

Some Questions Regarding Central Bank Independence

  • Table to compare CBI estimates of IT developing countries and Jamaica.

  • What do you think about CBI during the monetary targeting period, 1996-2002?

  • What can the financing of the fiscal deficit tell us about CBI?

Preconditions for IT in Jamaica

  • Is monetary policy influenced by public sector borrowing from the bank?

    • Between 1994 and 1998, heavy reliance on seigniorage for public financing.

    • In subsequent years, external borrowing was the main source for public financing.

    • However, fiscal imbalances remain at high levels.

Some Questions Regarding Fiscal Dominance

  • Fiscal imbalances might limit or restrict the credibility of future IT in Jamaica

  • Is there a plan to implement tax reform or an effort to reorganize government expenditures in Jamaica?

  • Do you think that the domestic capital market might become an alternative source for public financing?

Preconditions for IT in Jamaica

  • A flexible and independent monetary policy requires a “deep” financial system that is an alternative source for public financing.

    • According to the paper, there is a well functioning financial market in Jamaica.

      • Competitive interest rates, no financial repression.

      • Diversified instruments for savings and investment.

Some Questions Regarding Financial Depth

  • Could you tell us about the performance of private credit by banks as percentage of GDP?

  • Is there a regulatory and supervisory institution for the banking system?

  • What is the size and performance of the stock and bond market?

  • Is the financial system deep enough to absorb the placement of public debt?

Issues of IT design and implementation

  • Bosede analyzes the appropriate inflation index to use for IT, concluding that either core or headline inflation could be used as the relevant price index.

  • The author also uses a VAR model to show the effect of different inflation target horizon and the bandwidth on the stability of monetary policy.

  • Conclusion: a 24-month horizon is the adequate for a successful IT implementation.

General Questions

  • Given external shocks, is the Central Bank's commitment to price stability as a primary goal credible?

  • What is the import component of the price index?

  • What is the level of the dollarization degree of the financial system?

  • Is there an effort to coordinate fiscal and debt management policies?

  • What is the likelihood of new legislation to protect Central Bank independence?

Some Macroeconomic Indicators

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