IMF Survey : Monetary Policy in Developing Countries: The Way Forward
IMF News, December 3, 2015
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- Published: December 3, 2015
Overview
- Many low- and lower-middle income countries are seeking to implement modern monetary policy frameworks that better anchor inflation and promote macroeconomic stability and growth, according to a new study from the International Monetary Fund.
- Publication date: December 3, 2015.
- There has been significant progress toward the liberalization and deepening of financial markets over the past twenty years.
- Greater central bank independence, reduced fiscal dominance, and increased exposure to global capital markets have put pressure on an increasing number of lower income countries to modernize their policy frameworks.
Core findings and guidance from the IMF study
- The study by IMF staff, Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries, aims to provide guidance to low- and lower-middle income countries and uses the same set of principles that characterize effective monetary policy frameworks in countries with scope for independent monetary policy.
- The principles are described as encapsulating “the key characteristics of any sound forward-looking monetary policy framework,” and countries should consider how best they can follow them to support their reform agendas.
- While these principles are consistent with an inflation-targeting framework, the paper emphasizes that these frameworks are not the only way to implement them. “For one thing, the meaning of the term ‘inflation targeting’ varies and has evolved over time. The principles stated in the paper stress the primacy of a medium-term inflation objective, but do not require an unduly narrow focus on inflation at the expense of considering the impact on the real economy and the financial system,” the study says.
Principles that characterize effective monetary policy frameworks
- a clear mandate and operational independence to pursue its goals;
- price stability as the primary objective of monetary policy over the medium term;
- a medium-term inflation objective that guides monetary policy actions and communications;
- macroeconomic and financial stability considerations when determining policy;
- clear and effective operational framework aligned with market conditions and policy stance;
- transparent forward-looking policy strategy; and
- clear communications, which enhances the overall effectiveness of monetary policy.
Policy recommendations and reform priorities
- Price stability should be a primary objective in a country’s reform agenda as it moves to an interest-rate based operating framework and greater exchange rate flexibility.
- Development of analytical tools for policy making and techniques for effective communication are critical to help anchor inflation expectations.
- Critical first steps include a commitment to the primacy of price stability, and the ability of the central bank to pursue that goal.
- Avoid coexistence of multiple and often inconsistent targets and objectives; many challenges stem from such coexistence.
- Move forward on as many reform fronts as possible because progress can be self-reinforcing; reforms that can have a catalytic role should be conducted early in the modernization process.
Operational and technical measures for modernization
- Increase control over short-term interest rates by establishing appropriate central bank monetary instruments, which typically combine standing facilities, open market operations, and reserves requirement.
- The move toward interest-rate based frameworks can be swift, but the end point should be a framework where policy is signaled with a “policy rate” that anchors interest rates in the financial system.
- Enhance analytical capacity: improve the central bank’s capacity to interpret data to produce coherent medium-term forecasts and analysis, and provide policy recommendations consistent with the current and expected state of the economy and the policy objectives.
- Develop quantitative frameworks for monetary policy analysis and forecasting, including the development of a quarterly projection model.
IMF support
- The IMF study concludes by offering its continued support to low- and lower-middle income countries in their process of strengthening and modernizing their frameworks through:
- policy advice on institutional issues, both in surveillance and program contexts;
- technical assistance; and
- training.
Source: IMF Survey : Monetary Policy in Developing Countries: The Way Forward — IMF, December 3, 2015. https://www.imf.org/en/news/articles/2015/09/28/04/53/sopol120315a