bispap51国际清算银行.pdf

BIS Papers No 51 Perspectives on inflation targeting, financial stability and the global crisis Contributions to the BIS-sponsored sessions at the annual LACEA meetings in 2008 and 2009 Monetary and Economic Department March 2010 Contributions in this volume were prepared for BIS-sponsored sessions at the 2008 and 2009 Latin American and Caribbean Economic Association (LACEA) Annual Meetings, held in Rio de Janeiro and Buenos Aires respectively. The views expressed are those of the authors and do not necessarily reflect those of the BIS. Individual contributions (or excerpts thereof) may be reproduced or translated with the authorisation of the authors concerned. Copies of publications are available from: Bank for International Settlements Communications CH-4002 Basel, Switzerland E-mail: Fax: +41 61 280 9100 and +41 61 280 8100 This publication is available on the BIS website (). Bank for International Settlements 2010. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1609-0381 (print) ISBN 92-9131-822-1 (print) ISSN 1682 7651 (online) ISBN 92-9197-822-1 (online) Foreword Since 2006, the Bank for International Settlements (BIS), through its Representative Office for the Americas, has sponsored sessions at the annual meetings of the Latin American and Caribbean Economic Association (LACEA). The BIS invites high level central bank officials and leading academics to these sessions to stimulate the exchange of views on issues relevant to the central banking community in the region. In this BIS Paper, we are publishing selected presentations from the BIS-sponsored sessions at the two most recent LACEA annual gatherings: the November 2008 meeting, in Rio de Janeiro, and the October 2009 meeting, in Buenos Aires. The 2008 papers in this volume are by Jos de Gregorio, Governor of the Central Bank of Chile, and Guillermo Calvo, professor of economics at Columbia University; the 2009 presentations are by Vittorio Corbo, former Governor of the Central Bank of Chile, and Michael Dooley, professor of economics at the University of California, Santa Cruz. This volume includes introductions by Mr Gudmundsson, Deputy Head of the BIS Monetary and Economic Department (MED) when he chaired the 2008 session and now Governor of the Central Bank of Iceland; and by Philip Turner, Head of the BIS Secretariat Group when he chaired the 2009 session and now a Deputy Head of MED. The volume also contains a summary prepared by Camilo E Tovar, Senior Economist at the Americas Office, who organised and coordinated the sessions and edited the papers published here. We at the BIS and its Representative Office for the Americas are convinced that forums of this kind help improve the quality of the debate on topics that are relevant to the central banking community and the economies of the region. Gregor C Heinrich Chief Representative Office for the Americas BIS Papers No 51 iii BIS Papers No 51 v Contents Forewordiii Perspectives on inflation targeting, financial stability and the global crisis Camilo E Tovar.1 Part I: Challenges to inflation targeting.5 Challenges to inflation targeting: raising some issues Mr Gudmundsson.7 Recent challenges of inflation targeting Jos De Gregorio9 Inflation targeting in hard times Guillermo Calvo15 Part II: Central banks and the global crisis lessons and challenges19 Central banks and the financial crisis Philip Turner .21 Financial stability in a crisis: what is the role of the central bank? Vittorio Corbo27 Central bank responses to financial crises Michael Dooley.31 Perspectives on inflation targeting, financial stability and the global crisis Camilo E Tovar1 This volume contains four papers presented at the BIS-sponsored sessions at the 2008 and 2009 annual meetings of LACEA. Written by leading central bankers and distinguished academics, they address the challenges confronted in recent years by central banks that practice inflation targeting (IT) and issues arising from the global crisis. The first two papers were presented at the 2008 session, “Challenges to inflation targeting”, one by Jos de Gregorio (Governor of the Central Bank of Chile) and the other by Guillermo Calvo (professor of economics at Columbia University). Following those are papers from the 2009 session, “Central banks and the global crisis: lessons and challenges”, one by Vittorio Corbo (former Governor of the Central Bank of Chile) and the other by Michael Dooley (professor of economics at the University of California, Santa Cruz), The papers are preceded by the introductory remarks of the session chairs, Mr Gudmundsson (2008) and Philip Turner (2009). In his introduction to the 2008 session, “Challenges to inflation targeting”, Mr Gudmundsson raises four issues for IT central banks. How should they deal with (i) relative price adjustments; (ii) financial globalisation and the role of the exchange rate; (iii) credit and asset price booms; and (iv) financial stability concerns? Insights on some of these questions were provided by the panelists. In his contribution, Jose de Gregorio discusses three topics confronting central banks. The first is price stability versus financial stability. Following the Tinbergen principle, interest rate policy cannot deal with both macroeconomic stability and financial stability; additional instruments such as financial regulation are needed to deal with financial stability. Moreover, authorities must go beyond the usual coverage in inflation reports and monitor quantities (eg credit growth) as well as prices. His second topic is the challenge of relative price shocks, such as the steep increases in commodity prices seen prior to the Lehman bankruptcy. Those increases were associated with spikes in inflation (generally above target) across the region in late 2007 and the first half of 2008 (see Graph 1). Had these shocks dissipated quickly, they could have been easily managed within an IT framework. However, they were quite persistent, threatening to contaminate inflation expectations. De Gregorio argues that it can be very costly to raise interest rates aggressively in response to such commodity price shocks, and the impact on inflation may be limited. The solution is to allow inflation to return to target on its own by maintaining a sufficiently long time horizon for the inflation target. Finally, De Gregorio discusses intervention in foreign exchange markets. He notes that, although such intervention is sometimes necessary (eg to accumulate foreign reserves), flexible exchange rates can serve as a shock absorber, and they pose fewer risks than in the past because of a lower pass-through from the exchange rate to inflation. 1 Senior Economist, BIS Office for the Americas. I want to express my gratitude to LACEA organisers who facilitated the organisation of the BIS Sponsored sessions. In particular, I thank LACEAs President Mauricio Crdenas, and the Conference Chairs of the LACEA Annual Meetings in Rio de Janeiro and Buenos Aires, professors Aloisio Araujo and Andrs Neumeyer, respectively BIS Papers No 51 1 Guillermo Calvo highlights some important issues in the provision of foreign currency liquidity during turbulent times: First, he notes that, while foreign reserve accumulation is needed in the absence of an effective global lender of last resort, it is hard to determine when foreign reserve holdings are adequate. For example, foreign reserve adequacy in 2007 appeared to be much higher in Asia than in Latin America according to the ratio of foreign reserves to short-term external debt, but it was roughly comparable in the two regions according to the ratio of foreign reserves to M2. He argues that the second indicator is preferable. Second, Calvo recognises the usefulness of facilities such as the International Monetary Funds flexible credit line (FCL) and the Federal Reserves foreign exchange swap lines but thinks that there are some issues, such as the fact that not many countries have access, and the relatively short duration of these facilities. Third, Calvo points out that drawing down foreign reserves must be done with care because it can trigger capital flight. Furthermore, foreign reserve use is more effective if it targets specific sectors of the economy, such as the export sector. Calvo concludes with the observation that the global crisis has shown the need to include credit in macroeconomic models. He also notes that treasury bills may be close substitutes for money, in which case foreign exchange market intervention may play an important role in adjusting liquidity. In his introductory remarks for the 2009 session, “Central banks and the global crisis: lessons and challenges”, Philip Turner outlines three possible perspectives on the policy lessons of the crisis. One is microeconomic regulators did not provide an effective counterweight to market failures in the banking industry. A second is macroeconomic an overly narrow focus on price stability led central banks to neglect financial stability. A third is macroprudential not enough attention was paid to linkages between the macroeconomy and the financial system. In addressing these issues, Vittorio Corbo looks at two central bank roles: financial crisis prevention and crisis management. With respect to crisis prevention, Corbo argues that monetary authorities have to move away from the “clean up after the bubble” paradigm to one in which monetary policy “leans against the wind”. This may require a more discretionary and judgmental approach to asset prices. Furthermore, management of the policy interest rate is not enough for crisis prevention; central banks need to rely on other tools, including macroprudential policies (eg loan loss provisioning rules, capital standards and reserve requirements), procedures to deal with the failure of systemically important institutions, and intervention to avoid large misalignments of the exchange rate. Corbo sees macroprudential regulation as the best way to preserve financial stability by (i) reducing the incentives for increasing leverage during a boom and (ii) increasing the robustness of the system during a bust. With respect to crisis management, central banks must contain the damage of crises and limit their impact on the real economy. In particular, it is necessary to calm markets, reduce uncertainty due to liquidity restrictions, and, if no resolution mechanisms exist, prevent the collapse of systemically important institutions that could induce further damage to the system, even if they are insolvent. To achieve these financial stability goals, central banks need to offer extensive liquidity support against good collateral, reduce the policy rate aggressively and rely on non-conventional policies. Increasing their cooperation with fiscal authorities would complete the policy response. Finally, Michael Dooley argues that the monetary policy lessons being drawn from the crisis are wrong and that discussions in international forums about countercyclical prudential regulation are based on a misinterpretation of what caused the crisis. In Dooleys view, easy monetary policy in the United States had nothing to do with the crisis. In particular, notwithstanding global imbalances, there was no sudden stop in capital flows from emerging market economies (EMEs) to advanced countries, no spike in US real long-term interest rates and no collapse in the US dollar. 2 BIS Papers No 51 BIS Papers No 51 3 Dooley also argues that current regulatory proposals will do little because firms will find a way around regulations. Crises arise because profit motives and competition push leverage to unsustainable levels. There may be no set of regulations that can deal with the conflict between the profitability of leverage and the vulnerability of the system to leverage unless the system is pushed way beyond its efficient frontier. Therefore, he concludes, regulation is futile. What is needed is much stronger supervision. He identified three false assumptions that render supervision ineffectual: (i) private financial institutions care about the long-run value of the firm; (ii) markets impose self-discipline; (iii) private rating agencies are superior to government agencies in evaluating risk. Dooley makes two other points. First, he argues that crises are costly because they involve the disappearance of collateral outside the insured system, so the role of the changing value of collateral in crises needs more attention. Second, he suggests that although foreign reserves did not hurt, they helped little in insulating EMEs because the cause of the crisis was a failure in supervision and regulation. Federal Reserve swap lines with EME central banks and the flexible credit line (FCL) of the International Monetary Fund, although useful, are also of little help in insulating economies from such crises. Graph 1 Inflation and policy rates in inflation targeting countries Chile Colombia Mexico Peru 3 0 3 6 9 12 03 04 05 06 07 08 09 10 Inflation1 Inflation target2 Policy rate3 Inflation forecast4 3 0 3 6 9 12 03 04 05 06 07 08 09 10 3 0 3 6 9 12 03 04 05 06 07 08 09 10 3 0 3 6 9 12 03 04 05 06 07 08 09 10 Brazil Guatemala Uruguay Canada 5 0 5 10 15 20 25 30 03 04 05 06 07 08 09 10 5 0 5 10 15 20 25 30 03 04 05 06 07 08 09 10 5 0 5 10 15 20 25 30 03 04 05 06 07 08 09 10 3 0 3 6 9 12 03 04 05 06 07 08 09 10 1 Annual change in consumer prices, in percent. 2 Targets announced, in terms of CPI. 3 Forecasts made in January 2010 for year-end 2010, Consensus Economics. 4 For Brazil, SELIC overnight rate. For Chile, monetary policy rate. For Colombia, expansion minimum intervention date. For Mexico, prior to 2008, bank funding rate; after 2008, reference rate. For Peru, interbank rate. For Guatemala, “tasa lider”. For Uruguay, monetary policy rate. For Canada, overnight rate. Sources: IMF; Datastream; Consensus Economics; national data. BIS Papers No 51 5 Part I: Challenges to inflation targeting BIS-sponsored session at the Latin American and Caribbean Economic Association (LACEA) Annual Meetings Rio de Janeiro, November 2008 BIS Papers No 51 7 Challenges to inflation targeting: raising some issues1 Mr Gudmundsson2 Prior to my appointment at the BIS in 2004 I was the Chief Economist of the Central Bank of Iceland. There I played a role in the 2001 adoption of the inflation targeting (IT) framework. At that time, I was a great fan of IT. However, experience has brought with it a better appreciation of the challenges that come with it. Iceland was the first country that I am aware of to suspend IT because of a financial crisis. Prior to that episode some countries had left IT, but they did so only to enter a monetary union. At the BIS, I took an attitude to IT that is similar to that of Winston Churchills about democracy: “No one pretends democracy is perfect or all-wise indeed, it has been said that democracy is the worst form of Government except all those other forms that have been tried from time to time.” It is a fact that IT has been a great success story. New Zealand was the first country to adopt the framework, following the Bank of New Zealand Act of 1989. Since then, the IT group has grown to over twenty countries, among them several from Latin America. No country has to my knowledge regretted its adoption, although, as I noted, some left the group. The results have also been impressive in terms of the mean and the variability of inflation, without having a significant cost in terms of output volatility. Nonetheless, other countries have experienced similar developments, suggesting that, in some sense, this was driven by a benign environment, or good luck if you like. Despite such favourable conditions, it also seems to be the case that shocks to inflation have been less persistent among IT countries than among non-IT countries. But the goal of this session is not to discuss the success of IT. That story has been told over and over. Rather, we are here to discuss recent challenges that are putting IT to the test. Among those are the following: First, how should IT central banks react to persistent and potentially long-lasting changes in relative prices of oil and other commodities, as experienced in the recent past? Second, how does the ongoing process of financial globalisation complicate the conduct of monetary policy, especially in smaller countries? Related to this are the questions of how to deal with shrinkages in capital flows, the exchange rate, and the role, if any, of foreign exchange intervention in an IT framework. Third, in light of the potential medium-term damage to macroeconomic and price stability that can come from boom-bust cycles in credit growth and asset prices, how should those cycles be dealt with in an IT regime? Fourth, to what extent should financial stability concerns be factored into monetary policy decisions? Should there be more flexibility, longer horizons, leaning against the wind of asset price booms? Should there be a risk management approach in terms of financial disruptions as generally spoken by Mishkin or, should it be all of the above? I am not here to provide any answers. To discuss the issues, we called a very distinguished group of panelists. 1 Presentation delivered at the LACEA Annual Meeting, Rio de Janeiro, November 2008. 2 Governor, Central Bank of Iceland. At the time of the session, the author was Deputy Head of the Monetary and Economic Department at the BIS. Recent challenges of inflation targeting Jose De Gregorio1 It is a pleasure to be once again at LACEA. The Bank for International Settlements (BIS) invited us to talk about the challenges of inflation targeting (IT). I will do so generally, with some references to the Chilean economy. My remarks will touch upon three issues that I believe are relevant today for managing monetary policy. First, price