Monetary Policy in Developing Countries: The Way Forward

SUMMARY

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.

 
FREE EXCERPT

  • Low-income countries look to better control inflation through monetary policy
  • Sound principles of monetary policy to guide countries
  • IMF will continue to support countries’ efforts to modernize monetary frameworks
  • There has been significant progress made toward the liberalization and deepening of financial markets over the past twenty years. But according to the IMF, 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.

    Sound principles of monetary policy still apply

    The study by IMF staff, Evolving Monetary Policy Frameworks in Low-Income and Other Developing Countries, aims to provide guidance to this group of countries, and uses the same set of principles that characterize effective monetary policy frameworks in countries with scope for independent monetary policy. “These principles encapsulate the key characteristics of any sound forward-looking monetary policy framework,” the authors say, adding countries should consider how best they can follow them to support their reform agendas.

    The principles that characterize effective monetary policy frameworks by central banks, according to the report, include:

    • 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.

    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.

    Price stability a critical first step in reform agenda

    The report also emphasizes the importance of price stability as a...

    To continue reading

    REQUEST YOUR TRIAL