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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

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
Objective of the paper
  • Is inflation targeting (IT) an effective framework for monetary policy in Jamaica?
paper structure
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
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
Suggested list of preconditions before adopting IT
  • Central bank independence (CBI).
  • Macroeconomic stability.
  • Financial system stability.
  • Other institutional elements.
preconditions for it in jamaica
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
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 jamaica8
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
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 jamaica10
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
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
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
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?
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