Economic targeting. Targeting, types of targeting
Currently, in theory and practice, there are several main monetary policy regimes: exchange rate targeting, monetary aggregate targeting, inflation targeting and monetary policy without an explicit nominal anchor. At the same time, the monetary policy regime is defined as an organizational and managerial way of achieving monetary goals by the central bank of the country, using various channels of the transmission mechanism or a certain structured mechanism for the development and implementation of monetary policy. The term “targeting” used in the names of the three regimes refers to the use of economic policy instruments to achieve specific quantitative targets.
All monetary policy regimes are aimed at achieving price stability, but differ in the means of achieving this goal. A common feature of all monetary regimes is the presence of a macroeconomic variable or nominal anchor to which inflationary processes are tied. The difference between the different regimes is whether monetary policy is aimed at an ultimate goal, as in the case of inflation targeting, or intermediate goals, such as the exchange rate or money supply. When using intermediate goals, the connections between the intermediate goals and the final goal are relatively stable or fairly reliably predictable.
Monetary regimes are characterized by two trends. The first is the desire to set explicit monetary policy goals (inflation, money supply, exchange rate, or a combination of these). The second trend is the rapid growth in the number of countries in which monetary policy is based on inflation targeting, or where it is at least declared along with other monetary policy goals. These trends are observed in both developed countries and emerging markets.
4.3. Exchange rate targeting
Exchange rate targeting means linking the exchange rate of the national currency to the currency of a country or group of countries with a low level of inflation. The essence of this regime is to limit the magnitude and volatility of import inflation. The means to ensure stability of the nominal exchange rate are changes in interest rates and direct foreign exchange interventions.
The conditions for the successful use of exchange rate targeting are the implementation of macroeconomic policies that ensure a low difference in inflation rates relative to the anchor country, a sufficient level of international reserves, and, in the medium term, maintaining the competitiveness and overall creditworthiness of the country.
International experience in applying the exchange rate targeting regime has revealed a number of its advantages and disadvantages.
The advantages of this mode include:
Linking the domestic inflation rate to the growth rate of prices for traded goods and thus curbing import inflation;
Reduced inflation expectations in the event of the stability of the peg country's currency and confidence in its monetary policy;
Understanding of this regime by business entities and the population;
Relative ease of implementation of monetary policy.
The disadvantages of the pegged exchange rate regime are as follows:
A decrease in the effectiveness of monetary policy instruments due to the inability to use the exchange rate to stabilize the internal economic situation in the event of the emergence and implementation of risks in economic development;
The possibility of shocks occurring in the country of the anchor currency spreading to the country’s economy;
The risk of a speculative attack on the national currency, which increases with the prolonged maintenance of an overvalued fixed exchange rate. The growing likelihood of instability leads to higher interest rates.
Targeting based on the exchange rate is implemented in several options.
1. The main option is to fix the exchange rate of the national currency to the currency of one or more countries. As a rule, it is a large country with low inflation and a significant share in mutual trade.
2. A variation of the exchange rate targeting regime is the establishment of a range for the nominal exchange rate, within which it floats freely. In this case, speculative capital flows decrease due to increased exchange rate uncertainty and increased autonomy of monetary policy.
3. The “rolling fix” modification involves a controlled, smooth devaluation of the exchange rate, but usually less than the difference in inflation rates over the corresponding period. This modification prevents excessive appreciation of the real exchange rate, which could lead to a decrease in the price competitiveness of the country's products.
4. An extreme option for targeting based on the exchange rate is the currency board, in which the national currency is issued only in accordance with the growth of international reserves at a fixed rate.
Exchange rate targeting is most suitable for small open economies in which the exchange rate is a significant factor in determining the price level. The exchange rate provides a relatively useful anchor for regulating capital flows, reducing the risk of exchange rate speculation.
An important condition for effective monetary policy is the correct choice of its implementation model. The choice by monetary regulatory authorities of the monetary policy regime should be carried out depending on the priorities of the (strategic) final goals of monetary policy and take into account changes in the money supply, the speed of circulation of money, the reaction of economic variables to the use of monetary regulation tools, i.e., direct and indirect regulation of the sphere of monetary relations.
Regulation of monetary processes is a complex, complex concept that includes the following important components:
- 1) a legislatively and institutionally established procedure for the systematic influence of monetary authorities on the monetary market, for which intermediate and final development goals are established;
- 2) use of tools and methods of monetary regulation to achieve the goals;
- 3) transmission mechanism for conducting monetary policy, allowing for its positive impact on economic growth.
The strategy of monetary (monetary) policy is a method of long-term action, on the basis of which decisions are made regarding the use of certain instruments to achieve a set goal.
Monetary targeting, based on a specific monetary regime, is becoming a fairly new stage in the development of methods and instruments of monetary regulation. This means that a monetary indicator must be determined, the observance or achievement of which is the goal of the ongoing monetary policy. Most often, the parameter that determines the monetary policy regime is the targeting policy of a certain economic variable.
Monetary targeting gained widespread popularity in industrialized countries in the early 1980s. XX century, especially after the collapse of the Bretton Woods monetary system.
Under targeting It is advisable to understand the use of economic policy instruments to achieve quantitative targets for the target variable used by the monetary authorities in the country.
In a broader sense targeting represents the economic, tax and monetary policy of the state aimed at targeted management of the main macroeconomic indicators for the medium term. In other words, this is the choice of the economic “target” that needs to be influenced to achieve the goal.
The choice of a specific targeting regime means the choice by the monetary authorities of a target value of an indicator (i.e., an intermediate goal) or a target, the implementation of which should help ensure the final goal of monetary policy, as well as a mechanism by which the target value of the target can be achieved. Changes in this target value of the indicator are used as an early indicator of imbalances in the economy, which allows the central bank to respond to them promptly.
In a narrower interpretation targeting represents the establishment of goals for the monetary system, regulation of the money supply by central banks, i.e., the establishment of guidelines for the growth of monetary aggregates and other indicators.
The targeting regime is based on the monetarist concept, which establishes enhanced control over the aggregates of the money supply as the main instrument of the state’s monetary policy, and considers other interventions in economic life as undesirable.
The targeting regime sets specific goals for state regulation of the growth of monetary aggregates. At the same time, the choice of monetary policy goals and the instruments used will depend on macroeconomic and institutional conditions, and therefore on the development of the financial market, banking sector, foreign economic relations, etc.
Price stability is recognized as the main and only goal of monetary policy, while changes in the demand and supply of money and the impact on their value are the tools for achieving this ultimate goal.
Central banks of countries cannot directly achieve the final goal, and therefore they are forced to act indirectly, through targeting intermediate goals. However, when selecting alternative intermediate goals of monetary policy, the choice of a specific goal should take into account the characteristics of the transition economy and the stage of its development.
Consequently, based on which particular variable is targeted, monetary policy can operate in one mode or another. Traditionally, the following modes of monetary policy are distinguished (Table 4).
Table 4
Classification of monetary policy regimes
|
Monetary Policy Regime |
Rated armature |
|
Exchange rate targeting (currency targeting) |
National currency exchange rate (currency committee, traditional fixing, creeping peg, currency corridor) |
|
Monetary targeting (monetary aggregate targeting) |
Growth rate of monetary aggregates (Ml, M2 or M3) |
|
Inflation targeting |
Medium-term inflation targets |
|
Monetary policy without an explicit nominal anchor |
Monetary authorities do not undertake to fulfill obligations to ensure the achievement of specific values of nominal indicators |
Modern monetary policy has somewhat expanded this classification and is based on the use of the following monetary regimes: monetary targeting; exchange rate targeting; interest targeting; nominal GDP targeting; inflation targeting. For example, exchange rate targeting policies are used most often by developing countries and countries with economies in transition, while monetary aggregate targeting and inflation targeting are used mainly by developed countries and are not always effective for countries with economies in transition.
Direct instruments of monetary regulation show greater effectiveness in the initial stages of transition to a market economy, while with market development and decentralization, the effectiveness of indirect instruments, primarily open market operations and changes in interest rates, increases.
The emergence of various monetary regulation regimes was due to the collapse of the Bretton Woods monetary system and the desire to develop new guidelines for monetary policy. In the early 1990s. in developed and developing countries, central banks sought to more clearly define the intermediate goals of monetary policy (targeting inflation, exchange rate, money supply). The main advantages and disadvantages of these modes are summarized and presented in table. 5.
The practice of using various targeting regimes has shown that if for developing countries the introduction of such regimes was a progressive moment and meant strengthening their financial stabilization, then for developed countries, on the contrary, it was a regression that led to the loss of independence of monetary regulatory authorities, and, consequently , trust of economic entities in them. This led to the fact that, after a short period of using the currency targeting regime, developed countries began to switch to the inflation targeting regime, choosing inflation targeting as the goal. This regime is characterized by greater transparency, maximum independence of the central bank, and high autonomy of the country's monetary system.
Consequently, monetary targeting uses the absolute values of certain monetary aggregates or their relative increases as target indicators of monetary policy.
Advantages and disadvantages of different monetary policy regimes
Table 5
|
Advantages of the Monetary Policy Regime |
Disadvantages of the monetary policy regime |
|
Monetary targeting |
|
|
|
|
Currency targeting |
|
|
|
|
Inflation targeting |
|
|
|
|
Targeting without a clear nominal anchor |
|
in the USA and other developed countries |
|
Where m is the money supply; V is the velocity of circulation of one monetary unit; P—average price index; Q is real GDP.
Respectively
The real volume of production (Q) and the velocity of money (V) change under the influence of a number of external factors. Thus, a country’s GNP depends on the state of production factors, and the velocity of money circulation correlates with the interest rate.
When the money supply grows, price increases usually lag behind it. In practical terms, this situation has received repeated confirmation, in particular, during the Asian crisis of 1997. The accelerated growth of the money supply, both in cash and non-cash form, has a downward impact on the exchange rate. Consequently, regulation of the volume of the national money supply is objectively necessary to regulate the MFR.
The indicator of the national financial market - money supply M - consists of three main parts:
M1 - cash in circulation, funds in settlement and current accounts in banks, traveler's checks. In countries with developed markets, the M1 structure is dominated by check payments (in the USA up to 70% of all transactions, in France - 75%). In countries with developing markets, as a rule, check circulation is not developed, but is gradually developing with the help of plastic cards;
M2 - includes M1 plus time deposits in banks;
M3 - includes M2 plus government securities. Sometimes, in addition to the listed three components, the structure of the money supply includes the indicator M0 - cash (banknotes and coins in circulation).
In order to regulate the national financial market in the United States in the early 1990s. The following structure of the money supply has been determined (Table 7.6).
Table 7.6 Classification of US monetary aggregates 
Data on the money supply arrives at the central bank earlier than other data (such as inflation), so it is possible that the nominal money supply can be more tightly controlled than inflation itself. The nominal money supply as an object of regulation by the central bank can be structurally presented as follows: 
On the one hand, strict control over the money supply through the aggregates presented in Fig. 7.2, has a disciplinary effect on fiscal policy. Target monetary indicators do not require significant analytical work: annual assumptions of trend growth, trend velocity of money circulation and money supply multiplier are sufficient. On the other hand, monetary targeting has both conceptual and practical shortcomings. Conceptually, the use of target indicators of the money supply complicates the achievement of the ultimate goal - regulation of inflation, since it introduces additional target indicators. Money supply targeting always involves a number of assumptions: the central bank has complete control over the money supply, i.e. The money supply multiplier and money velocity are predictable. In practice, all of the specified monetary indicators were never met. Only a few countries with emerging markets (including Russia) still, by agreement with the IMF, still use Fisher equation indicators. European countries - members of the European Monetary Union have practically abandoned monetary targeting, controlling only the indicator
In the 1990s. Both developed and emerging market countries are faced with the same problem: both monetary targeting and exchange rate targets have virtually ceased to work as tools for regulating national and international financial markets. There is a need to search for new instruments for regulating financial resources. Such a tool since the early 1990s. in developed countries and since the early 2000s. Inflation targeting began in emerging markets.
Setting inflation targets (targeting) has become widespread in the last 5-6 years as a method of regulating the national financial market. Currently, 21 countries (8 developed and 13 countries with emerging markets) use inflation targeting (Table 7.7). Other countries are currently developing national inflation targeting models. However, despite numerous studies of inflation targeting in industrialized countries, its effects in emerging market countries have not been sufficiently analyzed.
To control the financial market, the hallmark of which is instability (we are talking about financial risks), one of the main regulatory instruments has always been the monetary policy of the central bank. Within its framework since the 1980s. money supply targeting was widely used, and since the late 1990s. — inflation targeting, or maintaining price stability.
Unlike alternative strategies: targeting the money supply or the exchange rate, which are designed to achieve low rates of inflation through intermediate variables (the growth rate of monetary aggregates or the level of the “anchor” exchange rate), inflation targeting involves direct adherence to inflation targets. Foreign literature provides various definitions of inflation targeting. As a result of already established practice, inflation targeting has two main characteristics that distinguish it from other instruments of monetary regulation of the financial market.
Table 7.7 Countries using inflation targeting 
Source: compiled from statistical reports of the IMF, BIS, ECB and central banks of individual countries.
First, the central bank is obliged to follow one numerical inflation indicator or a set range of inflation indicators. Therefore, the main goal of inflation targeting is price stabilization.
Secondly, inflation targeting cannot be carried out in the short term (contracts have already been concluded on specific prices, wages, etc.). Monetary policy can only influence expected future inflation. Therefore, the Swedish economist L. Svenson called inflation targeting “inflation forecast targeting.”
By changing monetary conditions to take into account new information, central banks gradually bring inflation rates into line with a given (target) indicator.
If you define inflation targeting by these two indicators, it becomes clear why neither the US Federal Reserve nor the ECB use inflation targeting. In the first case, numerical price caps are not applied, and in the second, the ECB traditionally attaches great importance to “benchmarks” for the growth of the euro area aggregate.
Proponents of inflation targeting argue that it has a number of advantages compared to other instruments of monetary regulation of the national (or regional) financial market. Inflation targeting:
helps to strengthen confidence in this financial market, as it shows that low inflation is the main goal of financial market regulation policy in a given country. Inflation targets are inherently clearer and better monitored and understood than money supply aggregates, which are revised annually and are difficult to control. The central bank’s ability to control exchange rate targets is also limited, since the level of the national currency is ultimately determined by its international demand and supply relative to the “anchor” currency, which cannot be easily compensated by the actions of the central bank alone;
provides greater flexibility, since inflation rates cannot be affected instantly, and the inflation target is always a medium-term goal. Short-term deviations from the target indicator are acceptable and do not necessarily lead to a decrease in confidence in the national financial market (see Table 7.7);
. allows you to reduce economic costs in case of failures with other monetary policy instruments. For example, pegging a national exchange rate to an anchor currency is usually accompanied by huge losses of central bank reserves, high inflation rates, financial and banking crises, and possible debt defaults.
A more detailed comparison of inflation targeting with two alternative instruments for regulating the national financial market (money supply targeting and exchange rate targets) allows us to draw the following conclusions.
As already indicated, since the late 1970s. and throughout the 1980s. Many central banks based their efforts to combat inflation on the basis of monetary targeting. It provided for the annual announcement of a target growth indicator for a certain monetary aggregate (t0; Dtp m2, /w3) based on the assumption that control over the growth of the money supply ensures control over inflation (I. Fisher’s identity, or the so-called equation of exchange). Data on the money supply arrives at the central bank earlier than other data (such as inflation), so it is possible that the nominal money supply can be more tightly controlled than inflation itself. Tight control of the money supply has a disciplining effect on fiscal policy. Monetary targets do not require significant analytical work: annual assumptions of trend growth, trend velocity of money circulation and money supply multiplier are sufficient.
Money supply targeting has both conceptual and practical shortcomings. Conceptually, the use of target indicators of the money supply only complicates the achievement of the ultimate goal - regulating inflation, since it introduces a number of additional calculation indicators. These targets are least suitable for emerging markets, e.g. with historically poor skills to curb inflation and weak confidence in the central bank. Money supply targeting has always assumed the following assumptions: the central bank has complete control over the money supply, i.e. The money supply multiplier and money velocity are predictable. In practice, all target money supply aggregates were never met. Currently, only a few developing countries (9 out of 22), in agreement with the IWF, still use the monetary indicators of the I. Fisher equation.
The second alternative instrument for monetary regulation of the financial market is also not ideal. There are two main types of exchange rate targets: fixed rates (currency boards, currency unions and unilateral dollarization) and fixed rates with the possibility of adjustments (bilateral pegs or to a basket of currencies, trailing pegs). To one degree or another, both types of exchange rate indicators involve following the country’s monetary policy with the “anchor” currency. And monetary unions (European, for example) imply a partial loss of independence in monetary policy and a significant loss of share premiums of member countries.
Exchange rate targets have three main disadvantages:
1) deprive central banks of independence in monetary policy in their own financial market;
2) create opportunities for external speculative attacks, and, consequently, financial crises and defaults;
3) the achievement of the real exchange rate depends on the level of domestic prices, and if prices are inertial, then this is associated with high production costs. As for fixed exchange rates with the possibility of adjustment, after the currency crisis of 1991, most countries abandoned them precisely because of the excessively high dependence on external speculative attacks.
Thus, financial market regulation instruments alternative to inflation targeting failed in the 1990s. a certain fiasco in countries with emerging markets, which forced them to look for new approaches to monetary regulation of national financial markets.
Critics of this new approach to financial market regulation through inflation targeting argue that it has significant shortcomings, i.e. Inflation targeting:
. restricts too much freedom of action and therefore unnecessarily restrains economic growth. In the initial stages, achieving a low and stable level of inflation may indeed require a reduction in output and unduly restrain economic growth;
. fails to limit expectations because it provides too much freedom of action, i.e. Inflation targeting provides choices for central banks regarding measures to achieve targets;
. implies high volatility of the exchange rate. Indeed, as soon as price stability is elevated to the rank of the primary goal of the central bank, this requires a policy of non-interference by the latter in the dynamics of the exchange rate, which can negatively affect both the exchange rate and economic growth;
. cannot be effective in countries that do not have the necessary set of prerequisites, as a result of which this system is not suitable for most countries with emerging markets. These prerequisites include: the stability of the financial market, the technical capabilities of the central bank to target inflation, the absence of subordination of monetary policy to budgetary considerations, and an effective institutional structure to maintain low inflation. Empirical studies of the effects of inflation targeting have so far focused on the experience of developed countries, which introduced inflation targeting in the 1990s. (see Table 7.7). Not a single study has provided convincing evidence of the positive impact of this regulatory instrument on financial markets, but neither has it shown its negative impact. The lack of convincing evidence of this or that result can be explained quite simply: 1) only eight developed countries use inflation targeting; 2) in the 1990s. all developed countries have improved their macroeconomic indicators, which has made it extremely difficult to isolate the inflation targeting factor from the overall positive dynamics; 3) in the 1990s. all developed countries had low and stable inflation rates. Therefore, the experience of countries with emerging markets is more indicative. Although the duration of their use of inflation targeting is short (from three to seven years), they introduced this regime, having relatively high inflation rates and volatile macroeconomic indicators. Against this econometric background, it is easier to recognize the extent of the impact of the inflation targeting factor. Perhaps more importantly, examining the experience of emerging market countries can test the effectiveness of inflation targeting during periods of economic instability and crisis. The results here are extremely convincing: between 1990 and 2004, in countries that did not use inflation targeting, the inflation rate fell from 40% in 1990-1997. up to 8-15% in 1998-2004. In countries that implemented targeting, the inflation rate decreased from 40% in 1990-1997. up to 2.5-5% in 1998-2004. At the same time, relative to other instruments of monetary control of inflation, the targeting method gave a decrease of 3.6 points compared to the methods of targeting the money supply and standardizing the exchange rate. Production volume also showed an upward trend. Therefore, there is no reason to believe that countries that used inflation targeting achieved their inflation target by stabilizing or artificially depressing real output. In all of these countries, inflation targeting performed better than pegged exchange rates. This conclusion is not surprising: controlling inflation is the main medium-term goal of any central bank. Inflation targeting leads to a reduction in the level of variability of inflation expectations, as well as inflation itself.
Inflation targeting in 1990–2005. could have yielded positive results due to the fact that in most countries with emerging markets that apply inflation targeting, structural reforms of national financial markets were carried out during the same period, which created the preconditions for inflation targeting. This requires: a developed technical infrastructure, a strong financial system, institutional independence, and an economic structure. The technical infrastructure includes: data availability, systematic forecasting, models that allow conditional forecasts to be made. If we take best targeting practices as a unit, then in emerging markets before the introduction of inflation targeting it was 0.29, and after - 0.97 (in developed countries - 0.98). The state of the financial market is assessed by the following factors: regulatory bank capital to assets taking into account risk; stock market capitalization to GDP; private bond market capitalization to GDP; stock market turnover ratio; exchange rates; maturity date of bonds. For countries with emerging markets, this indicator was: before the introduction of inflation targeting 0.41, after the introduction - 0.48. Institutional independence structurally consists of: budgetary obligations, operational independence, budget balance as a percentage of GDP, public debt as a percentage of GDP, independence of the monetary policy of the central bank. This indicator for the countries studied was: before the introduction of inflation targeting 0.59; and after - 0.72. The economic environment for the effectiveness of inflation targeting policy is based on: the impact of the exchange rate, sensitivity to commodity prices, the degree of dollarization of the national economy, and openness to trade. According to this indicator, countries with emerging markets had 0.36 before the introduction of inflation targeting, and 0.46 after the introduction.
Developed countries and countries with emerging markets use almost the same inflation targeting mechanism. In this regard, it is sufficient to develop one mathematical model for both markets. For countries that have used inflation targeting, the underlying average inflation rate should be consistent with the target; in other countries it is simply the “normal” level to which controlled inflation returns. Mathematically, this process can be expressed as follows:
where xi,t is the value of macroeconomic indicators x of country i in time period t; аT is the average value to which x returns for countries using inflation targeting; аN is the average value to which x returns for countries that do not use targeting; di,t is a variable equal to 1 for countries that use inflation targeting and 0 for countries that do not; Ф is the speed with which x returns to the level a characteristic of its group; if Φ is 1, then x returns completely to the original level of a, and if Φ is 0, then it is implied that x depends only on its past levels and has no tendency to return to any particular value.
Table data 7.8 is simply a version of equation (7.4), rewritten taking into account the change in x, adding an error term e and allowing two periods - before (pre) and after (post):
if we assume that:
That:
In these equations, the parameter for assessing the economic impact of inflation targeting is ax, the coefficient of the inflation targeting dummy, while a0 indicates whether there has been an overall improvement in macroeconomic indicators across countries, regardless of national financial market regulatory regimes. The set of x variables includes: inflation targets, inflation volatility and real GDP growth volatility, and the gap between potential and actual output.
Inflation targeting is a relatively new monetary policy tool for emerging markets. Inflation targeting in transition economies has coincided with lower inflation, softer inflation expectations, and lower inflation volatility than in countries that did not target. True, no visible impacts on output were observed, but alternative instruments for regulating the national financial market remained favorable (variability of interest rates, exchange rates, money supply, international reserves). All this explains the attractiveness of inflation targeting for emerging market countries that had very high inflation rates before the introduction of targeting. This obviously explains the fact that not a single country that has introduced inflation targeting has yet abandoned it. Moreover, inflation targeting is becoming increasingly preferable to targeting the money supply and holding the exchange rate within the framework of the monetary anti-crisis national policy developed by countries in 2009-2010.
1. Monetary targeting: “monetary anchor” (“monetary rule”)
Monetary targeting means using absolute values of certain monetary aggregates or their relative increases as target indicators of monetary policy.
This regime was used in most developed countries after the collapse of the Bretton Woods system in 1973 and was popular there for about 20 years. The reference countries for applying the monetary targeting regime were Germany and Switzerland. In Germany, it was not just the establishment of growth rates for the cash money supply, but also the targeting of broad monetary aggregates, a policy that continued until the creation of the eurozone in 1999. However, countries with developed monetary regimes (targeting aggregates M2, M3 and M4) quickly encountered their negative side effects: the impact on economic growth rates, the exchange rate and the state of the financial market, which forced them to periodically adjust previously approved targets.
Due to the negative consequences of the monetary targeting regime in the 90s, many developed countries began to abandon it. Thus, in Great Britain, since 1982, only the growth rate of the M0 aggregate has been established by law. Japan moved away from strict monetary targeting in 1992.
The United States abandoned setting guidelines for the M2 unit in 1993. At present, almost all developed countries have abandoned the establishment of benchmarks for the growth rates of broad aggregates of the money supply.
Meanwhile, in the 90s, the monetary targeting regime became the standard recommendation of the International Monetary Fund and a number of independent researchers for countries with transition economies and emerging markets in the first stages of market transformation.
Since countries with economies in transition usually do not have sufficient gold and foreign exchange reserves, this makes it difficult for them to apply alternative regimes - the establishment of a “currency anchor” or the introduction of a “currency board”. In addition, it takes time for the equilibrium value of the exchange rate to be established as a result of spontaneous market forces. Therefore, most countries moving towards a market economy first adhere to a floating exchange rate policy and only after some time, when certain successes have been achieved in the fight against inflation, they introduce regimes based on its management. This was the case in Russia, Lithuania, and Latvia. In Russia, guidelines for the growth of the cash money supply have been adopted since 1992.
At the same time, in countries with transition economies, the positivity of the monetary rule is also disputed by a number of economists. G. Calvo and F. Coricelli, P. Hilbers, P. Bofinger, G. Flassbeck and L. Hoffman point out an extremely important problem faced by states that have chosen a “monetary anchor”. This problem is in determining the demand for money in a transition economy, especially in the first stages of transformation.
As you know, M. Friedman proposed his monetary rule for developed countries with stable economies, in which the velocity of money is constant, and the dynamics of real GNP are easily predicted based on extrapolation of past trends. In addition, being a supporter of the monetary cycle, he did not recognize the real origin of the cycle, which means that the natural fluctuations of real GNP were beyond his sight. In countries with transition economies, forecasting the dynamics of real GNP is a rather difficult task, because its decline occurs for natural reasons, is associated with structural changes in the economy and even changes in statistics. At the same time, these countries have a natural level of inflation, which should also be included in regulatory monetary policy. Finally, it is quite difficult to determine changes in the velocity of money circulation, the structure of the money supply and the money multiplier, their dependence on the level of inflation, as well as the demand for monetary aggregates from emerging financial markets.
Following a “monetary anchor” in monetary policy, that is, pursuing a non-discrete monetary policy, almost always leads to significant fluctuations in real output.
At the same time, the question arises: how should monetary policy change as macroeconomic stabilization is achieved? There are two points of view on this issue. The first was expressed by R. Dornbusch and M. Simonsen, whose views gravitate towards new Keynesianism. In their book39 they write that stabilization leads to a decrease in the velocity of circulation of money, therefore, the demand for money increases, and the supply of money causes a much smaller inflationary effect than was the case before stabilization. It follows that the central bank must increase the money supply at a rate exceeding GDP growth. That is, the increase in GDP monetization under conditions of stabilization should be considered as an objective process. Another point of view was expressed by J. Rostovsky. Stabilization leads to an increase in the money multiplier, that is, the supply of broad money grows at a faster rate than the monetary base. If we summarize the two effects described above, it is easy to see that they act in the same direction: the first leads to an increase in the demand for money, the second to an automatic increase in the supply of money, and the policy pursued by the central bank must take into account their resultant effect.
2. Exchange rate targeting: “currency anchor”
There are several possible options for pursuing an exchange rate targeting policy, that is, establishing a “currency anchor”: fixing, “crawling peg”, “currency corridor”, which is sometimes considered as a type of soft fixing, and sometimes as a controlled float.
Exchange rate management policies were adopted by many emerging market and transition economies in the second stage of reform after “monetary rule”, in particular Chile, Colombia, Israel, Mexico, Hungary, Poland and Russia.
The introduction of a “currency anchor” in countries with transition economies contributes to short-term price stabilization. The “signaling effect” plays a special role. Fixing the exchange rate is tantamount to implicit administration of the prices of imported goods, in relation to which the entire system of relative prices is spontaneously positioned. The foreign exchange rate in this case plays the role of the scale of prices within a given country.
However, such a monetary regime can only give temporary results in the fight against inflation. In this case, the inflationary process does not stop, but goes into its hidden form - the accumulation of inflationary potential.
The release of this potential to the surface could cause a subsequent financial crisis, which includes three components: a currency crisis, a balance of payments crisis and a banking crisis.
3. Exchange rate targeting: “currency board”, “currency committee” (“currency board”)
To streamline monetary circulation in countries with high inflation and economic destabilization, a number of authors propose an even more radical option - the introduction of a special regime called the “currency board”. The essence of this regime is the 100% provision of the monetary base with the foreign exchange reserves of the state (Gross foreign exchange reserves (assets in foreign currency) can be balanced with the following liabilities: “monetary base”, “cash in circulation”, “money supply - M2 aggregate” or a broader monetary aggregate, including government securities. The choice of one or another liability depends on what obligations the government intends to undertake). Moreover, this system is considered as a modern analogue of the gold standard system. In its content, “currency board” is a kind of symbiotic monetary regime, including elements of a monetary and currency “anchor”.
The emergence of this regime was historically associated with colonialism. For the first time, the policy of currency board was introduced in the British dominions: in Mauritius in 1849, etc. Later, similar regimes were practiced by Italy in Somalia and the USA in the Philippines. However, upon gaining independence, the colonial countries abandoned monetary rule.
In the 90s of the 20th century, currency boards were introduced in countries with “emerging markets” and transition economies: Argentina (since 1991), Estonia (1992), Lithuania (1994), Bosnia (1997), Bulgaria (1997). Similar regimes were established in Taiwan, Singapore, Latvia, and partly in Azerbaijan. In Argentina, the new policy became a weapon in the fight against hyperinflation, in Lithuania - a means of international integration (there even the exchange rate of the national currency was fixed not to some foreign currency, but to the SDR), in Bosnia it was more of a forced means in war conditions, and in Asian countries, such regimes were aimed at mitigating the consequences of frequent currency crises. Such a policy is especially effective, according to Western economists, for small countries with open economies.
A number of Western economists (S. Hanke, K. Schuler, L. Jonang) strongly recommended such regimes for developing and post-socialist countries. This regime was first proposed by these authors for Yugoslavia back in 1991, and somewhat later they recommended it for Russia. Since the beginning of 1999, Russia has actually switched to a monetary policy of currency board.
The theoretical justification for the positive impact of “currency management” on reducing inflation includes two effects.
First- “disciplining effect”, which means that under the conditions of currency control, the central bank can no longer pursue an independent monetary policy and increase the money supply based on some of its own goals.
Second- “confidence effect”: it is believed that such a policy creates stable non-inflationary expectations of the public due to a high degree of confidence in the monetary authorities, because the institution of currency board itself usually involves external supervision. In addition, in the context of dollarization of the economy, which usually occurs in countries with transitional economic systems, foreign exchange support for the national monetary system has the same psychological impact that the gold standard once had.
In the same time The currency board imposes a number of additional restrictions on the economy .
Firstly, all other goals of monetary policy are abandoned.
Secondly, monetary and exchange rate orders must correspond to each other, form a unity, which means that responsibility for conducting monetary and exchange rate policies must be concentrated in one place.
Third, in the classic version of currency board, the exchange rate of the national currency is assumed to be fixed in relation to any international or reserve currency; only minor fluctuations are allowed within strictly declared boundaries for technical reasons.
Fourth, under strict currency management, full convertibility of currencies for residents and non-residents is guaranteed, subject to full provision of foreign exchange reserves in this reserve currency.
The proposed regime also causes a number of negative consequences. .
Firstly, it actually legitimizes the processes of dollarization of the national economy, recognizing them as a proper and desirable state of affairs.
Secondly, in order to achieve the stability of the national monetary unit, it is more correct to “peg” it not to any one foreign currency, for example, the dollar, taking on the risk of “dollar inflation”, but to be guided by the long-established rule of diversification, tying the ruble to a “basket of currencies” . It is no coincidence that on February 1, 2005, the Central Bank of the Russian Federation established a bi-currency basket consisting of 0.9 dollars and 0.1 euros as a currency benchmark. The Bank of Russia intervened only if the bi-currency rate went beyond the established corridor. Given the multidirectional changes in the dollar and the euro, the new exchange rate regime turned out to be softer, and the monetary policy of the Bank of Russia more flexible. At the same time, the Bank of Russia's foreign exchange reserves were being restructured in favor of the euro, and in 2007 the ratio of dollar and euro in the bi-currency basket was already 55% to 45%. Ideally, when determining the composition of a multicurrency basket, the content of different items of the Russian balance of payments should be taken into account: the current account, the capital account and services, broken down by the currencies of the counterparty countries.
Third, in fact, there is a disconnect between the state’s monetary policy both from the movement of nominal GNP and from the state of the state’s fiscal balance, which is fraught with macroeconomic imbalances, in particular, an unjustified change in the level of monetization of the economy.
Fourth, when pursuing a policy of currency management in a strict form, that is, with a fixation of the exchange rate, it is more correct to fix not the nominal, but the real exchange rate, in order to prevent changes in the terms of foreign trade, deterioration in the balance of payments and a decrease in the state’s gold and foreign exchange reserves. The mechanism for compressing the national money supply is also not clear if the state’s foreign exchange reserves are reduced, for example, as a result of international payments. In this case, balancing reserves and the national money supply is possible only through devaluation of the national currency. But then the goals of the currency board are not achieved.
Fifthly, in countries with a high degree of openness of the economy, the volume of foreign exchange reserves of the state may be subject to significant fluctuations if the trade balance items are represented by goods for which world prices are highly unstable. This is precisely the case in Russia, where one of the main sources of foreign exchange is the export of crude oil and gas. Fluctuations in the state’s foreign exchange reserves due to changes in world prices should, according to the “currency board” concept, cause adequate fluctuations in the national money supply, thereby generating fluctuations in loan interest. To prevent this, any excess inflow of foreign currency from abroad must be offset by its outflow. One of the measures to counter the influx of speculative foreign capital is also proposed by the neo-Keynesian J. Tobin, later recommended by the Russian economist V. Popov, taxation of interest income from short-term investments of non-residents.
A common argument against currency management is that it makes a country a net creditor to the country in whose currency its reserves are accumulated. There is a shift of the inflation tax in favor of the metropolitan state. When carried away by such regimes in the metropolitan country itself, control over the money supply may be lost.
It is unknown how states with accumulated reserve currencies will behave in the event of a significant drop in the dollar or euro on the foreign exchange market. If a massive dumping of reserve currencies begins, a colossal international monetary and financial crisis is possible, which will affect not only the US economy, but also the economies of countries with emerging markets. To prevent the depreciation of accumulated international reserves, some countries, in particular China, have recently begun to expand currency diversification, as well as practice their partial placement in foreign income-generating assets.
NOTE 1:
A common argument against the “currency board” policy is that it allegedly shifts inflation tax (seigniorage)
in favor of the metropolitan state. However, this argument is not entirely correct. Firstly, the foreign monetary system, through the “committee” regime, actually saves the economy of a given country from an inherently negative inflation tax that eats away at the state’s fiscal balance. Secondly, the Central Bank may well keep its foreign exchange reserves abroad and receive interest on them.
(Seigniorage in this case is a consequence of the excess of the growth rate of the money supply over the growth rate of real GDP, which leads to an increase in the average price level. As a result, all economic agents pay a kind inflation tax (seigniorage)
, and part of their income is redistributed in favor of the state through increased prices.)
“The proposed policy of the “Currency Committee” is not entirely adequate to the logic of economic processes (as well as previous policies of monetary and currency targeting), and therefore can give real results only over a limited period of time, only to achieve an intermediate goal and only if it is adapted (to the extent this is possible) to the institutional and structural features of the national economy.
In the very short term, the negative effects of such a policy objectively prevail over the positive effects, since it requires “belt compression.” In the medium term, the picture changes to the opposite: the policy of the “currency committee” makes it possible to achieve low rates of inflation, but this statement is also true provided that the above-mentioned factors of instability do not interfere with its implementation. And finally, in the long term, the policy of the “currency committee” leads to the accumulation of internal imbalances and can significantly impede the achievement of the goals of sustainable equilibrium in both the real and nominal sectors of the economy. An adequate monetary policy in the long term is only one that passively adapts to structural and institutional changes in the economy, that is, it follows not an instrumental, but the ultimate goal of public choice.
Our analysis of the positive and negative effects of this regime shows that, while allowing us to achieve short-term stabilization goals, in the long term, it leads to deepening economic imbalances, accumulation of inflationary potential (as a component of the inflation process), increased dependence on external economic conditions and on a foreign state , whose currency acts as an “anchor” of the new regime. Being inadequate to structural, institutional changes in the economy and the goals of public choice, the regime of the “currency committee” imposes on the country an economic policy of a dead-end nature ."
- Malkina M.Yu. "Features of inflation in an open economy and issues of organizing the Russian monetary system."
NOTE 2:
Differences between the balance sheet of a typical central bank and the balance sheet of a currency board
(based on the book: Moiseev S.R., “Monetary policy: theory and practice”, p. 276):
The currency board has in passive accounts there are banknotes and coins in circulation, but it usually does not deal with banks, as a result of which there are no bank reserves
.
The currency board holds only foreign reserves as assets, which serve as security for the issue of money. The lack of domestic assets means that it cannot lend to either the government or banks
.
In fact, the currency board is a kind of automatic mechanism for converting foreign currency into national funds and vice versa.
The currency board regime is of interest to us because at the end of 1998, after the devaluation of the Russian ruble, calls began to be heard among domestic politicians and economists for the introduction of a fixed exchange rate according to the “Argentine version”, based on currency board. The first to speak out in support of the idea of Russian currency board on the eve of the crisis was the famous financier George Soros.
In the summer of 1998, at the invitation of the government, the former Minister of Economy of Argentina, Domingo Cavallo, who is the author of the Argentine currency reform, visited Russia. At a meeting of the Federation Council on September 3, 1998, an anti-crisis project was announced, in the preparation of which some recommendations of Argentine consultants were taken into account. But the idea of a fixed exchange rate turned out to have many opponents. The Argentine "recipe" for healing the economy clearly did not suit Russia. The director of the New York bureau of the UN Economic Commission for Latin America said that Moscow “should not repeat what happened in other historical circumstances.” According to him, the UN Economic Commission for Latin America certainly recognizes the success of the Argentine peso-dollar program, but its implementation has led, in particular, to a huge increase in unemployment. In addition, Argentina carried out extensive privatization of power plants, telecommunications enterprises and large parts of the railways. In Russia, for a long time, serious resistance to the privatization process remained. Moreover, the parity of the Argentine peso and the dollar, established in 1991, was maintained thanks to the support of international financial institutions and international banks, but by 1998, to provide a number of emergency assistance programs, the IMF did not have enough funds to implement a similar program in Russia.
The idea of a Russian currency board was not realized
.
(Moiseev S.R.)
4. Inflation targeting
In the 90s of the 20th century, some economically quite developed countries abandoned the establishment of targets for growth of the money supply and moved directly to establishing benchmarks for inflation rates (inflation targets). Price stability is recognized as the sole objective of monetary policy. Everything else, including changing the supply of money and affecting its value, are tools to achieve this ultimate goal.
This replacement of goals occurred successively in New Zealand (institutional reforms of 1984, 1990), Canada (1988, 1991), Great Britain (1992), Sweden (1993), Finland (1993), Australia (1993), Spain (1994), South Korea (1998), Iceland (2001), Norway (2001). In the UK, the new policy replaced the exchange rate targeting policy that led to the currency crisis in September 199248. Switzerland has used a symbiotic monetary regime since 2000: along with setting limits for interest rate fluctuations (the three-month Libor rate), a medium-term inflation forecast is set, which serves as the second guideline for monetary policy. Inflation targeting has also been the monetary regime of the European Central Bank since its formation (1999).
With some delay, the developed countries were followed by the former socialist countries, which made the transition to market economic systems. The Czech Republic and Poland introduced new regimes during the monetary and financial crisis of 1997-1998: the Czech Republic during the attack on the crown in 1997, Poland in the fall of 1998, after inflation stabilized at 10% per year. Hungary switched to inflation targeting in 2001, replacing the policy of a managed forint exchange rate in the form of an inclined corridor. Then the regime was introduced by: Slovenia (2001), which later joined the European Monetary Union and accepted its rules of the game, Romania (2003), Slovakia (2005).
The interest of developing countries in inflation targeting was associated with the relative success of previous regimes, which made it possible to reduce the level of inflation and increase the degree of its predictability while achieving macroeconomic stability. Chile was the first country in this category to reform its monetary system (1990, 1999), followed by Israel (1997), Brazil (1999), Colombia (2000) and Mexico (2001). Among African countries, only South Africa switched to inflation targeting (2000).
From the countries of Southeast Asia: Indonesia (1999), Thailand (2000), Philippines (2002) - after overcoming the consequences of the monetary and financial crises of 1997-1998.
CIS countries periodically announce their intentions to introduce an inflation target in monetary policy. However, to date, only Kazakhstan has implemented them (2004). The readiness to switch to inflation targeting, periodically proclaimed by Russia and Ukraine, cannot yet be realized due to the inability of these countries to achieve moderate inflation rates. In Russia, the government has been setting forecast inflation values (consumer price index) since 2003, but during the forecast period they are constantly adjusted . In terms of its characteristics, this is still far from inflation targeting. In addition, during the crisis, the Central Bank of the Russian Federation returned to managing the exchange rate as an instrumental goal of monetary policy. Finally, core inflation forecasts in Russia are derived from global oil price forecasts, which makes them extremely unreliable.
The inflation targeting policy in almost all countries at the first stage proved its effectiveness. There was a significant decrease in inflation rates, and this drop was significantly higher than in other developed countries with similar characteristics of the economic system.
The policy of direct inflation targeting also revealed a number of significant limitations.
Firstly, the level of inflation depends not only on the monetary policy of the central bank, but also on the fiscal policy of the government, and in general on the behavior of economic entities. It is no coincidence that in some countries (New Zealand, Canada, Australia) an important element of the functioning of this regime is the conclusion of temporary agreements between the central bank and the government. In addition, it is necessary to complement it with strict antimonopoly policy of the state.
Secondly, the inflation targeting policy inevitably causes fluctuations in production volumes. Some authors consider this a major drawback of the new policy and propose combining it with output targeting, meaning the declaration of potential production levels and the limits within which the actual value of output may deviate from its maximum value;
Third, the policy under consideration is related to the problem of private individuals’ confidence in the announced growth targets for the general price index. If this trust exists, and it is supported by correct economic forecasts, that is, the announced targets are confirmed in reality, the policy of inflation targeting becomes an important tool for influencing the inflation expectations of the public and shaping its behavior in the desired direction. In turn, properly targeted behavior enhances the creditworthiness of a given policy. If the forecasts are constantly not confirmed, or the public is skeptical about the announced guidelines, there is no such interaction, and the policy fails.
The dependence of inflation on the external environment, the state of the fiscal balance and the peculiarities of tariff regulation of natural monopolies at different stages of the reform also acts as a certain limiter on the responsibility of the central bank for the level of inflation in the country in terms of its so-called “basic” component. Attempts to counteract inflation of non-monetary origin using monetary methods can lead to dire consequences for the real sector of the economy (decrease in production, employment, increase in the cost of credit, etc.), which will become hostage to the inflation targeting policy.
In addition, the policy of inflation targeting is possible only in countries with a stable economic system, with a long market history, in countries where there are no significant structural and institutional changes and where monetary instruments for “fine tuning” the economy are well established.
5. Loan interest targeting
Interest rate targeting regimes are used in some highly developed countries, where the main goal of the central bank is considered to be to ensure the stability of the financial system.
Currently, the interest rate targeting regime is actively used by the Bank of Korea, as well as the Swiss National Bank and the US Federal Reserve System. It is often used in conjunction with other monetary regimes. Some Western researchers consider monetary policy aimed at curbing interest rate fluctuations to be optimal for developed countries.
6. Targeting of nominal GDP.
Targeting nominal GDP or GNI as an alternative to inflation targeting was proposed by J. Taylor, as well as R. Hall and G. Mankiw in a joint study. The advantage of this regime is usually the possibility of joint control of a nominal variable (inflation) and a real variable (real GDP), as well as their mutual compensation in the case of inaccurate forecasting. The advantage of this regime is also its direct connection with forecasting the demand for money, which should become the basis for the formation of money supply by central banks.
Meanwhile, this regime is subject to the most criticism from scientists and politicians.
Let's summarize.
In the change of monetary regimes one can detect its own internal logic, corresponding to the fundamental scheme of macroeconomic stabilization. To suppress high inflation, monetary targeting is first used. In this way, purely monetary factors of inflation are suppressed. After the formation of the market exchange rate mechanism in countries with open economies, a transition is made to currency targeting or to a “currency board” regime symbiotic with the monetary regime. This helps regulate external factors of inflation. As relatively low rates of internal inflation are achieved, it is advisable to introduce regimes based on directly targeting one or another price index, especially since the “natural rate of inflation” is calculated quite well and contains an ever-increasing amount of uncertainty. And as a certain distant prospect, a policy based on monitoring structural changes and economic growth rates, and the corresponding monetary regime of targeting nominal GDP, is seen.
An adequate monetary policy in the long term is only one that passively adapts to structural and institutional changes in the economy, that is, it follows not an instrumental, but the ultimate goal of public choice.
NOTE:
"- You should not abandon fixing the exchange rate when the economy is poorly diversified and the main share of export-import transactions falls on one country (it is advisable to “peg” it to the currency of the country of the main trading partner). However, in this case, achieving price stability will require restrictions on capital flows;"
S.K. Dubinin, Moscow State University named after M.V. Lomonosov (Moscow, Russia),
ON THE. Miklashevskaya, Moscow State University named after M.V. Lomonosov (Moscow, Russia)
"TRANSITION TO FREE COURSE EDUCATION IN RUSSIA WITHIN THE FRAMEWORK OF A STRATEGY DIRECTED TO ACHIEVE PRICE STABILITY"
Targeting is the monetary policy of the state, central banks or an individual enterprise with the establishment of targets for the growth of the money supply. The target can be, firstly, a specific control figure, and secondly, a certain “corridor” (sometimes called a “fork”).
Inflation targeting is a set of measures that are carried out by government agencies to control the rate of inflation in the state. It represents the management of inflation through the financial instruments of the state's monetary policy.
Types of targeting
Inflation targeting by the central bank of the state is carried out as follows:
- firstly, forecasting inflation dynamics,
- secondly, comparison of forecast data with the planned inflation value,
- thirdly, based on the resulting difference between the planned and forecasted values, a specific adjustment to monetary policy is developed.
In the EEC countries, a combination of monetary targeting based on the M3 monetary aggregate and inflation targeting is used. The main tools for manipulating inflation are setting a specific deposit rate and refinancing rate. A nuance: the refinancing rate is higher than the deposit rate.
Monetary targeting is a way of implementing the economic policy of the state in which the Central Bank maintains specific specified parameters for fluctuations in the money supply. To do this, the following conditions must be met:
1. The total volume of the money supply must be controlled by monetary policy in a specific time period.
2. A stable connection between money and the price level (in this case, price stabilization can be achieved by limiting the money supply).
Monetary aggregate targeting is the most traditional, but increasingly rarely used monetary policy instrument. The use of the instrument is advisable in countries whose economies are not subject to sharp fluctuations and minimally depend on the currencies of other countries. It allows the central bank to bring monetary policy in line with the internal needs of the economy of a given state without taking into account foreign economic policies.