Download Challenges for Inflation Targeting in Emerging Markets in View of

Challenges for Inflation Targeting in EM
in View of the Current Global Crisis
by
Leonardo Leiderman
Berglas School of Economics, Tel-Aviv University, Israel
([email protected])
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
Israel: strong IT credibility in spite of frequent deviations of
inflation from target
8%
Inflation rate – year over year
12-month ahead break-even
inflation
6%
4%
2%
0%
-2%
-4%
1.02
1.03
1.04
1.05
Sources: Bank of Israel and Central Bureau of Statistics
1.06
1.07
1.08
1.09
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
GDP growth rates – The figures for 2009/10 are IMF
forecasts
8.3%
Emerging Economies
World
Advanced Economies
8%
6%
5.2%
4.0%
4%
2.7%
1.9%
1.6%
2%
0.0%
0%
-1.3%
-2%
-4%
2007
Sources: IMF
-3.8%
2009F
2010F
Single-digit inflation rates in EM: here to stay?
Testing time ahead for monetary policy
9%
7.9%
8%
7%
6%
5.9%
5.7%
4.7%
5%
4%
3%
2%
1%
0%
2003-2006
Source: IMF
2007-2008
2009F
2010F
Weaker fiscal discipline ahead:
EM budget deficits as percent of GDP
5.0%
4.4%
4.0%
3.6%
3.0%
2.0%
1.0%
0.9%
0.0%
-0.1%
-1.0%
2003-2006
Source: IMF
2007-2008
2009F
2010F
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%
40%
LTMAX
LTD
30%
24%
26%
25%
19%
20%
10%
11%
10%
2%
0%
Turkey
Sources: Bloomberg
Mexico
Brazil
Israel
Colombia
…points to regime change in terms of a key
monetary policy tradeoff
Exchange
Rate
Variability
B
Now: Rely on ER
flexibility
Before the current crisis:
fear of floating
A
Interest Rate Variability
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
THANK YOU!