Bernard J. Laurens

Managing Capital Flows: Lessons from the Experience of Chile

As a result of the Asian crisis, methods of coping with volatile international capital markets have received considerable attention from observers and policymakers. It has been argued that the imposition by Chile of a nonremunerated reserve requirement on external borrowing played a useful role in the smooth liberalization of its capital account by allowing Chile to deal effectively with short-term capital inflows and thus to reduce its vulnerability to external shocks, and that such measures should be adopted by other countries. In light of this, this paper reviews Chile`s experience in managing capital flows and draws lessons for policymakers.

China: Strengthening Monetary Policy Implementation

The Peoples Bank of China (PBC) has made great strides in modernizing its monetary policy frameworks but their effectiveness will diminish as the sophistication of the economy increases. Empirical evidence supports maintaining a reference to money in Chinas monetary strategy and enhancing the role of interest rates in its conduct. We advocate adoption of an eclectic strategy involving the monitoring of several indicators, and of a short-term interest rate as the operational target. The PBC should be granted discretion to change its policy rate, and there are no technical obstacles for such a move to occur in the near future.

The Measurement of Central Bank Autonomy: Survey of Models, Indicators, and Empirical Evidence

This paper presents a survey of the literature on the measurement of central bank autonomy. We distinguish inputs that constitute the building blocks in the literature, and the literature that builds on them. Issues including sensitivity analysis, robustness, and endogeneity are discussed. The review shows that empirical evidence regarding the beneficial effects of central bank autonomy is substantial, although some technical issues still remain for further research. In particular, central bank autonomy raises the issue of subjecting the monetary authorities to democratic control; this calls for additional research on the linkages between central bank autonomy and accountability and transparency. Additional empirical analysis on the relationship between the financial strength of the central bank and its de facto autonomy, and between its autonomy and financial stability, would also be desirable.

Measures of Central Bank Autonomy: Empirical Evidence for OECD, Developing, and Emerging Market Economies

This paper presents an update of the Grilli-Masciandaro-Tabellini (GMT) index of central bank (CB) autonomy, based on CB legislation as of end-2003. The index is applied to a set of OECD and developing countries, and emerging market economies. For a smaller set of countries, the paper presents a reconstruction of the GMT index based on Cukierman (1992) and assesses changes in CB autonomy between 1992 and 2003. The results point to a significant increase in CB autonomy, in particular for developing countries. In most cases, this improvement has involved a three-stage process: an initial stage in which the political foundations for CB autonomy are laid; a second stage in which operational autonomy develops; and a final stage in which CBs gain further political autonomy in terms of policy formulation and the appointment of senior management.

Requirements for Using Interest Rates As An Operating Target for Monetary Policy:The Case of Tunisia

This paper discusses the use of interest rates as the operating target for monetary policy in Tunisia and the roadmap for establishing the other building blocks of an inflation targeting framework. It argues that strengthening the effectiveness of the current monetary policy framework will facilitate the adoption of inflation targeting over time.

Monetary Policy Implementation in China: Past, Present, and Prospects

While much has already been achieved, monetary policy implementation in China is still in transition. The effectiveness of the current framework, which still relies intensively on rules-based measures, is likely to diminish over time as the sophistication of the economy increases. The authorities are faced with the following challenges: (i) the choice of a nominal anchor; (ii) the choice of an operating target; (iii) the choice of operating instruments; and (iv) the right timing to introduce greater flexibility of the exchange rate. This chapter reviews the framework for monetary policy implementation in China by summarizing the practice of monetary policy over the past 30 years and by discussing the way forward.

The Journey to Inflation Targeting: Easier Said than Done the Case for Transitional Arrangements Along the Road

Countries with evolving monetary regimes that decide to embark on “the Journey to inflation targeting” may not be able to adopt a full-fledged inflation targeting regime immediately. Those countries would be better off adopting transitional arrangements that take advantage of the informational content of monetary aggregates, developing an economic analysis capacity, and concentrating on monetary operations aimed at steering money market interest rates. This approach would allow the central bank to buy time for developing the building blocks for effective monetary policy, support transparent central bank communication, and limit the potential for undesirable outcomes along the road.

Global Trends in Central Bank Governance

This chapter1 discusses global trends in CB governance based on the indicators of independence, accountability, and transparency presented in Chapter 4, and which are applied to CBs from advanced countries, emerging markets, and developing countries. Our analysis is based on the levels of CB independence, accountability, and transparency observed in the recent period. Furthermore, we analyze the evolution of CB independence over time (i.e., since the late 1980s) on the basis of measurements reported in GMT (1991) and Cukierman (1992). Given that such measurements do not exist for the other pillars of CB governance (i.e., transparency and accountability) an analysis of their evolution over time is not possible.

Survey of Models and Indicators of Transparency

The importance of monetary policy transparency is now largely taken for granted – a far cry from Alan Greenspan’s reported remark after his appointment as Chairman of the Federal Reserve Board in 1988: “I guess I should warn you, if I turn out to be particularly clear, you have probably misunderstood what I said.” CBs around the world now wrestle with how to achieve better, rather than just more, transparency. This chapter investigates the long path followed by CBs, practitioners, and academics away from a position of opaque talk, towards transparency in monetary policy. The broad consensus that transparency is an integral part of a sound governance framework for CBs reflects the understanding that the success of monetary policy also depends on how the CB communicates its objectives, adopted measures, and achieved results to the public. Accurate and frequent communication is expected to enhance CBs’ credibility and the confidence of the private sector over time. Hence, transparency is a necessary complement to independence.

Policy Lessons from Global Trends

Our assessment of CBs’ governance framework shows that CBs have changed dramatically in the past three decades in ways that would have been inconceivable back in the late 1970s or early 1980s. Building on the literature that highlights their benefits, CBs, irrespective of the country’s income level, have been granted higher independence; have become more accountable to those which have granted them independence; and have significantly boosted the transparency of their operations. Such a framework for CB governance which developed over time is based on the consensus that CBs should be entrusted with the primary mandate to preserve the public good of stability. This broad-based consensus stems from the view, backed by empirical analysis, that price stability is the best contribution that monetary policy can make to help the economy achieve its maximum potential output, and that any attempts to sacrifice the medium-term goal of price stability for efforts to meet other short-term objectives will adversely affect the credibility and effectiveness of the CB and ultimately weaken long-term economic growth. To allow the CB to achieve its delegated responsibility of protecting price stability, it must be made independent from the government so that its decisions are not influenced by short-term political and electoral objectives.1 However, independence does not mean isolation, and the CB must be accountable to those from whom it receives its mandate and independence.