Download Implementing Inflation Targeting in Brazil

One Year of Inflation Targeting in
Brazil
Marvin Goodfriend
Federal Reserve Bank of Richmond
Central Bank of Brazil
Rio de Janeiro
July 10-11, 2000
Key Aspects of Inflation Targeting
•
•
•
•
•
•
put price stability first
announce numerical targets
full information to set instrument
transparency to support credibility
accountability to discipline central bank
challenges for Brazil
2
Put Price Stability First
•
•
•
•
•
communicate rationale: experience, theory
mandate priority for inflation goal
CB responsible for price stability
CB independence: financial, instrument
implicit support from other institutions and policies
3
Announce Numerical Targets
•
•
•
•
•
explicit commitment
burden on CB to explain misses
anchor expectations
focus discussion of macroeconomic policies
foundation for quantitative monetary policy
analysis
4
Full Information To Set Instrument
• use all information to forecast future inflation
pressures and to position interest rate policy
• improve quantitative econometric modeling
techniques
• recognize estimation, simulation complications due
to short regime history, imperfect credibility
• rely on market sentiment, indicators of inflation
expectations
5
Transparency to Support Credibility
• use transparency to develop credibility
• convey comprehensive assessment of inflation pressures -relate fiscal, monetary, exchange rate developments
• use Inflation Report to present coherent, unified view of shortrun policy situation
• provide assessment of data
• provide quantitative understanding of policy
• speak out if fiscal, exchange rate, trade, banking policies
conflict with inflation target
• central bank governor should act as go-between: enhance
communication between markets and policymakers
6
Accountability to Discipline Central
Bank
• disciplines CB
• reinforces CB responsibility for inflation
• gives CB opportunity to demand that fiscal, trade,
credit policies conform to inflation target
• gives CB opportunity to point out costs of policies
in conflict with inflation target
7
Challenges for Inflation Targeting in
Brazil
• CB has responsibility without full authority for
price stability
• fiscal policy, exchange rate policy must be made to
conform to inflation target
• inflation targeting procedures provide window of
opportunity to change institutional behavior
8
Challenges for Inflation Targeting in
Brazil
• improve understanding of Brazilian laws,
institutions, data, and fiscal, trade, banking policies
to enhance credibility and reduce Brazil’s premium
in capital markets
• fiscal dominance must be overcome for inflation
targeting to succeed--provide a quantitative framework in the Inflation Report for understanding the
relationship between fiscal policy, inflation
targeting, interest rate policy, and economic growth
9
Challenges for Inflation Targeting in
Brazil
• transparency, credibility of inflation target
enhanced by outspoken, independent CB governor
openly critical of economic policies that jeopardize
inflation target
• Market concern that exchange rate policy could
conflict with price stability could hurt credibility
for the inflation target. What is policy behind CB
acquisition and sales of foreign reserves?
10
Challenges for Inflation Targeting in
Brazil
• create understanding of reasons for adjustment of
flexible exchange rate (terms of trade shock,
foreign growth, change of interest differential)
• bring down high bank reserve requirements and
maintain strong supervision and regulation of
banks
11
Challenges for Inflation Targeting in
Brazil
• lengthen the maturity of the public debt
• explain principles behind managed price policy
• although widely used around the world, inflation
targeting framework not yet tested by generally
rising inflation
12