challenges for inflation targeting in em in view of the current global crisis by leonardo leiderman...
TRANSCRIPT
Challenges for Inflation Targeting in EM in View of the Current Global Crisis
by
Leonardo Leiderman
Berglas School of Economics, Tel-Aviv University, Israel
To be presented at the National Bank of Georgia’s international conference, Tbilisi, June 26-27, 2009
Initial concerns about using IT in EM…
Once upon a time it was argued that:• “IT will not work in EM”• “There is a very high pass-through from exchange
rates to prices”• “To stabilize inflation it is essential to have a
nominal exchange-rate anchor”• “EM lack monetary policy credibility and
transparency”• “De facto, central banks will not have operational
independence”• “EM inflation dynamics will be mainly governed by
fiscal dominance and not by monetary policy”
Yet, it is common to find EM where…
• IT is being used as the monetary policy framework for reducing and stabilizing inflation
• The nominal exchange rate has become flexible• Fiscal discipline has been tightened• Monetary policy has gained credibility• Fiscal and monetary policy have become more
transparent• No immediate changes in this monetary regime
(i.e., IT) are being contemplated
Brazil as a case where inflation targets are highly credible
Source: Banco Central Do Brasil
-4%
-2%
0%
2%
4%
6%
8%
1.02 1.03 1.04 1.05 1.06 1.07 1.08 1.09
Israel: strong IT credibility in spite of frequent deviations of inflation from target
Inflation rate – year over year
12-month ahead break-even inflation
Sources: Bank of Israel and Central Bureau of Statistics
Some ‘good news’ for EM in the context of the current global crisis
• EM are playing a stabilizing role for the global economy
• No major crises or imbalances in most EM; decoupling…
• Good functioning of FX markets• Substantial gains in EM stock and
bond markets YTD• Inflation has remained under control
EM Growth is Expected to Lead the Global Recovery
8.3%
1.6%
4.0%
5.2%
-1.3%
1.9%2.7%
-3.8%
0.0%
-4%
-2%
0%
2%
4%
6%
8%
2007 2009F 2010F
Emerging Economies
World
Advanced Economies
GDP growth rates – The figures for 2009/10 are IMF forecasts
Sources: IMF
Single-digit inflation rates in EM: here to stay? Testing time ahead for monetary policy
5.9%
7.9%
5.7%
4.7%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2003-2006 2007-2008 2009F 2010F
Source: IMF
Weaker fiscal discipline ahead:EM budget deficits as percent of GDP
0.9%
-0.1%
4.4%
3.6%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
2003-2006 2007-2008 2009F 2010F
Source: IMF
The nominal exchange rate as a shock absorber: currency depreciation since the Lehman event of Sept. 15, 2008… % nominal exchange rate depreciation up to June 19, 2009 (LTD) and up to mid March (LTMAX)
43% 44%
39%
19%
26%24% 25%
10% 11%
2%
0%
10%
20%
30%
40%
Turkey Mexico Brazil Israel Colombia
LTMAXLTD
Sources: Bloomberg
…points to regime change in terms of a key monetary policy tradeoff
A
B
Exchange Rate Variability
Interest Rate Variability
Now: Rely on ER flexibility
Before the current crisis: fear of floating
Major difficulties and challenges ahead
• The return of fiscal dominance?• A larger role for central banks as lenders of last resort? • How to deal with growing risks of corporate debt defaults?• Is there room for quantitative easing as a policy
instrument?• A larger role of asset prices in setting the policy rate?• How to deal with commodity-price fluctuations? • Weak growth but higher inflation: back to the Phillips
curve dilemmas?
In summary: the next few years will be a severe testing time for inflation targeting not only in emerging-market economies
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