Comments: “Inflation Targeting Framework for Jamaica: An

Empirical Exploration”

Myriam Quispe-Agnoli

Federal Reserve Bank of Atlanta

Conference on Inflation Targeting

October 4 –5, 2004

Objective of the paper

• Is inflation targeting (IT) an effective framework for monetary policy in Jamaica?

Paper Structure• Monetary Policy in Jamaica since 1990.

• Literature review comparing the IT experience of developed and developing countries.

• Review of the fundamental requirements for IT in Jamaica.

• Discusses the implementation of IT in Jamaica.

Comments’ Outline

• I will follow the outline of the paper for my comments:– First, I will look at the preconditions for

inflation targeting (IT) followed by questions on specific topics

– Second, I will discuss the some issues on IT design and implementation

– Finally, I will bring general questions

Suggested list of preconditions before adopting IT

• Central bank independence (CBI).

• Macroeconomic stability.

• Financial system stability.

• Other institutional elements.

Preconditions for IT in Jamaica

• Does the Central Bank have a reasonable degree of operational independence to ensure flexibility in monetary policy towards achieving the inflation target?

Central Bank is independent but…- There is no law that prohibits public financing- Political independence is limited by the presence

of government representatives on the board

Some Questions Regarding Central Bank Independence

• Table to compare CBI estimates of IT developing countries and Jamaica.

• What do you think about CBI during the monetary targeting period, 1996-2002?

• What can the financing of the fiscal deficit tell us about CBI?

Preconditions for IT in Jamaica• Is monetary policy influenced by public

sector borrowing from the bank? – Between 1994 and 1998, heavy reliance on

seigniorage for public financing.– In subsequent years, external borrowing was

the main source for public financing.– However, fiscal imbalances remain at high

levels.

Some Questions Regarding Fiscal Dominance

• Fiscal imbalances might limit or restrict the credibility of future IT in Jamaica

• Is there a plan to implement tax reform or an effort to reorganize government expenditures in Jamaica?

• Do you think that the domestic capital market might become an alternative source for public financing?

Preconditions for IT in Jamaica

• A flexible and independent monetary policy requires a “deep” financial system that is an alternative source for public financing.– According to the paper, there is a well

functioning financial market in Jamaica.• Competitive interest rates, no financial repression.

• Diversified instruments for savings and investment.

Some Questions Regarding Financial Depth

• Could you tell us about the performance of private credit by banks as percentage of GDP?

• Is there a regulatory and supervisory institution for the banking system?

• What is the size and performance of the stock and bond market?

• Is the financial system deep enough to absorb the placement of public debt?

Issues of IT design and implementation

• Bosede analyzes the appropriate inflation index to use for IT, concluding that either core or headline inflation could be used as the relevant price index.

• The author also uses a VAR model to show the effect of different inflation target horizon and the bandwidth on the stability of monetary policy.

• Conclusion: a 24-month horizon is the adequate for a successful IT implementation.

General Questions• Given external shocks, is the Central Bank's

commitment to price stability as a primary goal credible?

• What is the import component of the price index?• What is the level of the dollarization degree of the

financial system?• Is there an effort to coordinate fiscal and debt

management policies?• What is the likelihood of new legislation to protect

Central Bank independence?

Some Macroeconomic IndicatorsChange in Credit to Private SectorReal GDP

Inflation rate Exchange Rate* as % of GDP (%)1994 35% 33% 23% 1.0%1995 20% 6% 24% 2.3%1996 26% 6% 25% 0.4%1997 10% -5% 24% -1.1%1998 9% 3% 28% -1.2%1999 6% 7% 28% 0.9%2000 8% 9% 31% 0.8%2001 7% 8% 12% 1.5%2002 7% 5% 14% 1.1%2003 10% 19% n.a. n.a.

* (-) appreciationSource: IFS, IMF.