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CENTRAL BANK AND MONETARY POLICY. Mario A. García Lara Vice-President of the Banco de Guatemala. Origin of the Central Banks. Riksbank (Sweden, 1656) and Bank of England (1694) arise as state banks (debt management)

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central bank and monetary policy

CENTRAL BANK AND MONETARY POLICY

Mario A. García Lara

Vice-President of the Banco de Guatemala

origin of the central banks
Origin of the Central Banks
  • Riksbank (Sweden, 1656) and Bank of England (1694) arise as state banks (debt management)
  • It is generalized as of the beginning of the XXc., before the need to have an only money issuer and reduce banking chaos during the era
slide3

Origin of the Central Banks

  • The Federal Reserve System in the United States arises in 1914.
  • The Bank of Canada began operations in 1934 after the “ Great Depression”.
  • In 1914 there were 18 central banks. In 1950 there were 59, and 161 in 1999.
  • Their role as only issuers allowed them to regulate the MONETARY POLICY
slide4

Monetary Policy: a component of the economic policy

ECONOMIC

POLICY

EFFICIENCY

POLICIES

MONETARY

POLICY

FISCAL

POLICy

INSTITU-

TIONAL

POLICY

=

+

+

+

DEREGULA-

RIZATION AND

OPENING

PROMOTE

EFFICIENCY

(SUPPLY)

MONETARY

OFFER AND

INTEREST RATE

INFLUENCE W/O

ADDED

DEMAND

EXPENSES AND

TAXES

INFLUENCE W/O

ADDED

SUPPLY AND

DEMAND

INSTITUTION

IMPROVEMENTS

“GAME RULE”

(SUPPLY)

INSTRUMENTS

INCREASE

THE

PRODUCT-

IVITY

PRESERVE

STABILITY

SUPPORT

STABILITY

AND PRO-

DUCTIVITY

MAKE

GROWTH

VIABLE AND

SUSTAINABLE

OBJECTIVES

GROWTH AND DEVELOPMENT

slide6

Simplified Economic Policy

fiscal policy

monetary policy

The temporary tank only avoids a crisis temporarily, while the main problem is solved.

If the temporary tank overflows, an economic crisis of great proportion will ocurr

money

Inflation deficit devaluation

production

slide7

Simplified Economic Policy

  • Macroeconomic Crisis: in almost all countries.
  • In Guatemala:
  • Inflation: 32% (‘85), 61% (‘90)
  • Ext. Deficit: 6.7% (‘81), 7.1 (‘92)
  • Devaluation: 45% (’90), 14% (’99)
  • Central banks are entrusted the responsibility of preserving stability in the general level of prices
slide8

Recent Evolution of Central Banks

  • Technological Progress + economic integration + financial globalization  the traditional functions of central banks turn more complex and difficult.
  • Central banks can not pursue multiple objectives of economic policy (like they did two decades ago); now they are centered in a main objective: promote stability in the general level of prices.
slide9

The role of the Banco de Guatemala in the Economy

    • A. Fundamental Objective
  • Following international standards, the Organic Law (article 3) establishes the objective of
    • “…contributing to the creation and maintenance of the most favorable conditions for orderly development of the national economy, for which, it will propitiate the monetary, exchange rate and credit conditions, that promote the stability in the general level of prices”.
slide10

INCREASE EFFECTIVITY OF THE MONETARY POLICY

Orientation of the Organic Law (2002)

STRENGTHEN AUTONOMY

PROPITIATE MACROECONMIC

STABILITY

STRENGTHENCREDIBILITY

CREDIBILITY + AUTONOMY = EFFECTIVITY  STABILITY

slide11

EFFECTIVITY =

CREDIBILITY + AUTONOMY

  • III. ECONOMIC FINANCIAL AUTONOMY
  • treatment of the net deficiencies or net excess of the central bank maintenance of capital of the central bank on behalf of the State
  • zero credit to the government
  • clear definition of central bank-government relations
  • II. OPERATIVE
  • AUTONOMY
  • independence in the use instruments
  • overlap in the period of duration of the Directors regarding the Executive Power
  • destitution of Directors only for an established cause
  • IV. TRANSPA-RENCY and ACCOUNTS RENDITION
  • the monetary policy and its foundations must be made known to the public
  • the central bank must render accounts periodically before Congress
  • I.
  • CLARITY OF THE FUN- DAMENTALOBJECTIVE
  • eases the consecution of the objective
  • establishes a correct scheme of account rendition before society
slide12

1st. Pillar in the Organic Law

CLARITY OF THE FUNDAMENTAL OBJECTIVE

Article 4 establishes that the functions of the institution are exercised privileging the achievement of the mentioned objective

Article 3 establishes that as its fundamental objective the Banco de Guatemala will promote the stability in the general level of prices

Articles 26, 30, and 34 establish that the attributions of the Monetary Board, of the Presidency and the Management are exercised without undermining the achievement of the mentioned objective

  • Instruments are redefined in function of the objective:
  • Legal reserve (Arts. 43 to 45)
  • OMAs (Art. 46)
  • Exchange ops. (Art. 47)
  • PUI (Art. 48)
slide13

2nd. Pillar in the Organic Law

OPERATIVE AUTONOMY

Article 13 reaffirms the integration of the Monetary Board, according to article 132 of the Constitution, and article 14 declares that the members must act in function of national interest and of the fulfillment of the fundamental objective of the central bank.

Article 26 reaffirms the constitutional power of the Board to determine the monetary policy, and article 40 delegates the Banco de Guatemala, as an autonomous entity, the capacity to execute said policy through an Execution Committee

Articles 28 and 84 establish overlap in the duration of the charge of President and Vice-president of the Banco de Guatemala, regarding the presidential period of the Executive Organism

Article 20 establishes the causal for which the President, Vice-president and the elected members of the Monetary Board can be removed.

slide14

3rd. Pillar in the Organic Law

ECONOMIC AND FINANCIAL AUTONOMY

  • Patrimonial strengthening of the central bank.

Article 83 foresees making the accumulated cost of monetary, exchange rate and credit policy

  • Credit to the government.

Article 71 observes, among others, the prohibition to the central bank to grant credit to the government contained in article 133 of the Political Constitution of the Republic of Guatemala.

  • Maintenance of capital in the central bank.

Articles 8 and 9 establish that the net deficiencies or excess derived of the execution of the monetary, exchange rate and credit policy will be absorbed by the State

slide15

4th. Pillar in the Organic Law

TRANSPARENCY and ACCOUNT RENDITION

Articles 63 and 64 establish that it is obligatory to publish the Board debates and the resolutions that correspond to the determination of the monetary, exchange rate and credit policy

Article 61 establishes the publication of the monetary policy report with an explanation of the operations made to reach the fundamental objective

Article 62 establishes that it is obligatory to report information and general publication of important data associated to the business of the central bank

Article 34 literal i) establishes the publication of the Income and Expense Budget of theBanco de Guatemala

slide16

4th. Pillar in the Organic Law

TRANSPARENCY and ACCOUNT RENDITION

Article 11 establishes that the financial statements of the central bank must be made according to the generally accepted norms and principles with international standards adopted by the Monetary Board at the proposal of the Bank Superintendence.

Article 60 establishes that the President of the Banco de Guatemala must appear before the Congress of the Republic in January and July to render accounts on the results of the execution of the monetary, exchange rate and credit policy of the country.

Article 62 refers to the monthly report of the general balance of the Banco de Guatemala, as well as the annual report on its financial statements, and article 12 requires an external audit to the central bank

slide17

FAVORABLE EXTERNAL

MONETARY

POLICY

ENVIRONMENT

DISCIPLINED

MACROECONOMIC

STABILITY:

SAVINGS

MORE PRODUCTION

FISCAL

POLICY

INTEREST RATE

FACTORS:

(LONG TERM)

INVESTMENT

SUSTAINABLE IN THE L.P.

ADEQUATE

ECONOMIC

ADEQUATE

  • POLICY TO IMPROVE EFFICIENCY
  • Deregulation of prices
  • Commercial opening
  • Financial Liberalization
  • Privatization

GROWTH

INFRASTRUCTURE

HUMAN CAPITAL

(health and education)

ADEQUATE

BETTER USE OF

FACTORS:

PRODUCTIVITY

  • INSTITUTIONS
  • Property rights
  • Regulatory Agencies (superintendence)
  • Autonomy of the central bank; fiscal regulations
  • Social Security
  • IMPERIO OF THE LAW
  • POLICY TO IMPROVE INSTITUTIONS
  • To CREATE markets
  • To REGULATE markets
  • To STABILIZE markets
  • To LEGITIMIZE markets

SOCIAL INTERNAL

HARMONY

Economic Policy and Growth:

slide18

The propitiate stability of prices:

  • savings, investment and productivity
  • Better life quality when preserving the value of salary, of savings and of pensions
  • Interest rate (long term) lows
  • Reduction of public debt service (which frees resources for social investment), of business and home debt

STABILITY IS INDISPENSABLE FOR ECONOMIC GROWTH

framework of the economic policy in guatemala 1970 2006
Framework of the economic policy in Guatemala, 1970-2006

Central Bank Autonomy

Monetary Policy

Exchange Regimen

Financial Policy

Mobility of Capital

Fiscal Policy

Expenses

Income

Explicit Inflation Goals

Flexible ER with an exchange rule

Legal and Solidity Reform

Full liberty forcapital (Free Negotiation Law)

New Organic Law

SAT

Banking Crisis

Exchange Dsorder

Zero Credit to the government (constitu-tional reform)

Moderate Management

Liberalization without appropriate regulation

Tributary Reform

Monetary Aggregates

Multiple ER Big devaluation

Control exchange

Gradual adjustment

Absolute loss of discipline

Regulation for exit and entry of capital

Fiscal Dominance: credit to the government

Convertibility Till

Financial Repression

Structural Weakness

Moderate Management

Fixed ER

thank you very much

Thank you very much!

MAGL

June, 2006