MIB

Monetary and Exchange Regimes

Under Stress

A different paradigm?

Mario I. Blejer

marioblejer@blejer.com
Until the crisis, there has been, in Emerging
Markets, a growing convergence toward
4 monetary concepts:

Increasing acceptance of central bank

independence.

The adoption of some formal structure of
Inflation Targeting.

Exchange Rate flexibility.

Full liberalization of Capital Flows.
Emerging Markets seem to “graduate” in
terms of finding – in IT – a golden rule
for its monetary policy regime.

Inflation targeting was not necessarily very

successful in reaching its objective:
targets have been missed about 40% of
the time.

However, no country that adopted IT as a

monetary regime has dropped it.
• The feeling has been that IT has been able to
increase credibility, transparency, and
accountability of monetary policy.

• It has been believed that IT helped to separate

clearly between monetary and fiscal policy and
has avoided “Fiscal Dominance” in the conduct
of monetary policy.

• The perception is that IT has contributed to the

develop local currency markets, and therefore
to eliminate the “original sin”.
In terms of practical results: Inflation in EM
was tamed but remained relatively high
compared with advanced economies:
9%
7.9%
8%

7%
5.9% 5.7%
6%

5% 4.7%

4%

3%

2%

1%

0%
2003-2006 2007-2008 2009F 2010F

Fuente: FMI
 But EM Rates of Growth where
high and remained resilient
8%
7.2% 7.2%
7%

6%

5% 4.7%

4%

3%

2% 1.5%
1%

0%
2003-2006 2007-2008 2009F 2010F

Source: IMF
 What has the Crisis Changed?

The Policy Dilemmas for Advanced
Countries are not so Different from those
of Emerging Countries – In fact they are
more acute in Advanced Economies

The Structural Models supporting IT have

been grossly deficient in incorporating the
role of credit, financial stability, and the
structure of lags.
 What has the Crisis Changed?

The Output objective seem to largely dominate in
decision making.

The distinctions between fiscal and monetary

policies have been blurred again.

Central Banks have faced the ZIRP problem very

soon, needing to resort to “Quantitative Easing”.

The importance of defining “Exit Policies”

becomes overwhelming to avoid destroying the
complete IT structure.
USA: GDP vs. Monetary Growth
 USA: Money vs. Credit Growth:
The Collapse of the Money Multiplier

Source:IIF M2/Monetary Base

 The greatest challenge for monetary policy in
advanced economies: getting the exit right – and
at the right time – from quantitative easing

Exiting too early may lead to a rise in

unemployment and a return to financial
crisis, especially when the banking system
is weak and undercapitalized.

Late exit can reload an asset price bubble
and lead to an inflation scare

Prolonged uncertainty about fiscal and
monetary exit strategies can result in a
negative impact on real investment
Questions on how this affects the monetary
framework of Emerging Economies

1. The return of fiscal dominance?

 Weaker fiscal discipline ahead in EM:
EM budget deficits as percent of GDP
5,0%
4,4%

4,0% 3,6%

3,0%

2,0%

0,9%
1,0%

0,0%
-0,1%
-1,0%
2003-2006 2007-2008 2009F 2010F

Source: L.Leiderman
Questions on how this affects the monetary
framework of Emerging Economies

1. The return of fiscal dominance?

2. Is there room for quantitative easing in

Emerging Economies?
 A case of a very active expansionary monetary
strategy is Israel – who was also the first to start
raising rates

100.000 5,0%
95.000 4,5%
90.000 4,0%
85.000 3,5%
80.000 3,0%
M1
75.000 2,5%
BOI RATE
70.000 2,0%
65.000 1,5%
60.000 1,0%
55.000 0,5%
50.000 0,0%
2007,1 2008 2008,1 2008,1 2009 2009,1
Questions on how this affects the monetary
framework of Emerging Economies

1. The return of fiscal dominance?

2. Is there room for quantitative easing in

Emerging Economies?

3. Should Foreign Exchange market

intervention be used as a policy instrument?
 Questions on how this affects the monetary
framework of Emerging Economies

1. The return of fiscal dominance?

2. Is there room for quantitative easing in

Emerging Economies?

3. Should Foreign Exchange market

intervention be used as a policy instrument?

4. Weak growth but higher inflation: back to

the Phillips curve dilemmas?
Questions on how this affects the monetary
framework of Emerging Economies

5. Is there a role, and what are the

instruments of Monetary Policy to deal with
asset bubbles?

6. Can this be done in the context of Inflation

Targeting or should be the realm of Macro-
Prudential regulation?

7. Is there a revival of interest for Capital

Controls?
 Questions on how this affects the monetary
framework of Emerging Economies
1. The return of fiscal dominance?

2. Is there room for quantitative easing in Emerging Economies?

3. Should Foreign Exchange market intervention be used as a policy

instrument?

4. Weak growth but higher inflation: back to the Phillips curve

dilemmas?

5. Is there a role, and what are the instruments of Monetary Policy to

deal with asset bubbles?

6. Can this be done in the context of Inflation Targeting or should be the

realm of Macro-Prudential regulation?

7. Is there a revival of interest for Capital Controls?

 FINAL THOUGHTS

• Some of the dilemmas are the “cost of

success”. For example: how to avoid asset-
price booms when inflation expectations are
low and the appetite for risk is growing fast?

• Monetary policy and central banking are

“arts” not “sciences” and pragmatism should
prevail over “principle”: Moral Hazard is not
more important that common sense…

• Central Banking should not be “boring”.

MIB

THANK YOU

marioblejer@blejer.com