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1、Monetary Policy Strategy:The International ExperienceFrederic S. MishkinGetting monetary policy right is crucial to the health of the economy. Overly expansionary monetary policy leads to high inflation, which decreases the efficiency of the economy and hampers economic growth. The United States has
2、 not been exempt from inflationary episodes, but more extreme cases of inflation, in which the inflation rate climbs to over 100% per year, have been prevalent in some regions of the world such as Latin America, and have been very harmful to the economy. Monetary policy that is too tight can produce
3、 serious recessions in which output falls and unemployment rises. It can also lead to deflation, a fall in the price level, as occurred in the United States during the Great Depression and in Japan more recently. As we have seen in Chapter 8, deflation can be especially damaging to the economy, beca
4、use it promotes financial instability and can even help trigger financial crises. In Chapter 18 our discussion of the conduct of monetary policy focused primarily on the United States. However, the United States is not the source of all wisdom about how to do monetary policy well. In thinking about
5、what strategies for the conduct of monetary policy might be best, we need to examine monetary policy experiences in other countries. A central feature of monetary policy strategies in all countries is the use of a nominal anchor (a nominal variable that monetary policymakers use to tie down the pric
6、e level such as the inflation rate, an exchange rate, or the money supply) as an intermediate target to achieve an ultimate goal such as price stability. We begin the chapter by examining the role a nominal anchor plays in promoting price stability. Then we examine three basic types of monetary poli
7、cy strategyexchange-rate targeting, monetary targeting, and inflation targetingand compare them to the Federal Reserves current monetary policy strategy, which features an implicit (not an explicit) nominal anchor. We will see that despite the recent excellent performance of monetary policy in the U
8、nited States, there is much to learn from the foreign experience. The Role of a Nominal AnchorAdherence to a nominal anchor forces a nations monetary authority to conduct monetary policy so that the nominal anchor variable such as the inflation rate or the money supply stays within a narrow range. A
9、 nominal anchor thus keeps the price level from growing or falling too fast and thereby preserves the value of a countrys money. Thus, a nominal anchor of some sort is a necessary element in successful monetary policy strategies. One reason a nominal anchor is necessary for monetary policy is that i
10、t can help promote price stability, which most countries now view as the most important goal for monetary policy. A nominal anchor promotes price stability by tying inflation expectations to low levels directly through its constraint on the value of domestic money. A more subtle reason for a nominal
11、 anchors importance is that it can limit the time-consistency problem, in which monetary policy conducted on a discretionary, day-by-day basis leads to poor long-run outcomes.1The time-consistency problem of discretionary policy arises because economic behavior is influenced by what firms and people
12、 expect the monetary authorities to do in the future. With firms and peoples expectations assumed to remain unchanged, policymakers think they can boost economic output (or lower unemployment) by pursuing discretionary monetary policy that is more expansionary than expected, and so they have incenti
13、ves to pursue this policy. This situation is described by saying that discretionary monetary policy is time-consistent; that is, the policy is what policymakers are likely to want to pursue at any given point in time. The problem with timeconsistent, discretionary policy is that it leads to bad outc
14、omes. Because decisions about wages and prices reflect expectations about policy, workers and firms will raise their expectations not only of inflation but also of wages and prices. On average, output will not be higher under such an expansionary strategy, but inflation will be. (We examine this mor
15、e formally in Chapter 28.) Clearly, a central bank will do better if it does not try to boost output by surprising people with an unexpectedly expansionary policy, but instead keeps inflation under control. However, even if a central bank recognizes that discretionary policy will lead to a poor outc
16、omehigh inflation with no gains on the output frontit may still fall into the time-consistency trap, because politicians are likely to apply pressure on the central bank to try to boost output with overly expansionary monetary policy. Although the analysis sounds somewhat complicated, the time-consi
17、stency problem is actually something we encounter in everyday life. For example, at any given point in time, it seems to make sense for a parent to give in to a child to keep the child from acting up. The more the parent gives in, however, the more the demanding the child is likely to become. Thus,
18、the discretionary time-consistent actions by the parent lead to a bad outcomea very spoiled childbecause the childs expectations are affected by what the parent does. How-to books on parenting suggest a solution to the time-consistency problem (although they dont call it that) by telling parents tha
19、t they should set rules for their children and stick to them. A nominal anchor is like a behavior rule. Just as rules help to prevent the timeconsistency problem in parenting, a nominal anchor can help to prevent the time consistency problem in monetary policy by providing an expected constraint on
20、discretionary policy. In the following sections, we examine three monetary policy strategies exchange-rate targeting, monetary targeting, and inflation targetingthat use a nominal anchor. Exchange-Rate TargetingTargeting the exchange rate is a monetary policy strategy with a long history. It can tak
21、e the form of fixing the value of the domestic currency to a commodity such as gold, the key feature of the gold standard described in Chapter 20. More recently, fixed exchange-rate regimes have involved fixing the value of the domestic currency to that of a large, low-inflation country like the Uni
22、ted States or Germany (called the anchor country). Another alternative is to adopt a crawling target or peg, in which a currency is allowed to depreciate at a steady rate so that the inflation rate in the pegging country can be higher than that of the anchor country. Exchange-rate targeting has seve
23、ral advantages. First, the nominal anchor of an exchange-rate target directly contributes to keeping inflation under control by tying the inflation rate for internationally traded goods to that found in the anchor country. It does this because the foreign price of internationally traded goods is set
24、 by the world market, while the domestic price of these goods is fixed by the exchange-rate target. For example, until 2002 in Argentina the exchange rate for the Argentine peso was exactly one to the dollar, so that a bushel of wheat traded internationally at five dollars had its price set at five
25、pesos. If the exchange-rate target is credible (i.e., expected to be adhered to), the exchange-rate target has the added benefit of anchoring inflation expectations to the inflation rate in the anchor country. Second, an exchange-rate target provides an automatic rule for the conduct of monetary pol
26、icy that helps mitigate the time-consistency problem. As we saw in Chapter 20, an exchange-rate target forces a tightening of monetary policy when there is a tendency for the domestic currency to depreciate or a loosening of policy when there is a tendency for the domestic currency to appreciate, so
27、 that discretionary, time-consistent monetary policy is less of an option. Third, an exchange-rate target has the advantage of simplicity and clarity, which makes it easily understood by the public. A “sound currency” is an easy-tounderstand rallying cry for monetary policy. In the past, this aspect
28、 was important in France, where an appeal to the “franc fort” (strong franc) was often used to justify tight monetary policy. Given its advantages, it is not surprising that exchange-rate targeting has been used successfully to control inflation in industrialized countries. Both France and the Unite
29、d Kingdom, for example, successfully used exchange-rate targeting to lower inflation by tying the value of their currencies to the German mark. In 1987, when France first pegged its exchange rate to the mark, its inflation rate was 3%, two percentage points above the German inflation rate. By 1992,
30、its inflation rate had fallen to 2%, a level that can be argued is consistent with price stability, and was even below that in Germany. By 1996, the French and German inflation rates had converged, to a number slightly below 2%. Similarly, after pegging to the German mark in 1990, the United Kingdom
31、 was able to lower its inflation rate from 10% to 3% by 1992, when it was forced to abandon the exchange rate mechanism (ERM, discussed in Chapter 20). Exchange-rate targeting has also been an effective means of reducing inflation quickly in emerging market countries. For example, before the devalua
32、tion in Mexico in 1994, its exchange-rate target enabled it to bring inflation down from levels above 100% in 1988 to below 10% in 1994. Despite the inherent advantages of exchange-rate targeting, there are several serious criticisms of this strategy. The problem (as we saw in Chapter 20) is that wi
33、th capital mobility the targeting country no longer can pursue its own independent monetary policy and so loses its ability to use monetary policy to respond to domestic shocks that are independent of those hitting the anchor country. Furthermore, an exchangerate target means that shocks to the anch
34、or country are directly transmitted to the targeting country, because changes in interest rates in the anchor country lead to a corresponding change in interest rates in the targeting country. A striking example of these problems occurred when Germany reunified in 1990. In response to concerns about
35、 inflationary pressures arising from reunification and the massive fiscal expansion required to rebuild East Germany, long-term German interest rates rose until February 1991 and short-term rates rose until December 1991. This shock to the anchor country in the exchange rate mechanism (ERM) was tran
36、smitted directly to the other countries in the ERM whose currencies were pegged to the mark, and their interest rates rose in tandem with those in Germany. Continuing adherence to the exchange-rate target slowed economic growth and increased unemployment in countries such as France that remained in
37、the ERM and adhered to the exchange-rate peg. A second problem with exchange-rate targets is that they leave countries open to speculative attacks on their currencies. Indeed, one aftermath of German reunification was the foreign exchange crisis of September 1992. As we saw in Chapter 20, the tight
38、monetary policy in Germany following reunification meant that the countries in the ERM were subjected to a negative demand shock that led to a decline in economic growth and a rise in unemployment. It was certainly feasible for the governments of these countries to keep their exchange rates fixed re
39、lative to the mark in these circumstances, but speculators began to question whether these countries commitment to the exchange-rate peg would weaken. Speculators reasoned that these countries would not tolerate the rise in unemployment resulting from keeping interest rates high enough to fend off a
40、ttacks on their currencies. At this stage, speculators were, in effect, presented with a one-way bet, because the currencies of countries like France, Spain, Sweden, Italy, and the United Kingdom could go only in one direction and depreciate against the mark. Selling these currencies before the like
41、ly depreciation occurred gave speculators an attractive profit opportunity with potentially high expected returns. The result was the speculative attack in September 1992 discussed in Chapter 20. Only in France was the commitment to the fixed exchange rate strong enough so that France did not devalu
42、e. The governments in the other countries were unwilling to defend their currencies at all costs and eventually allowed their currencies to fall in value. The different response of France and the United Kingdom after the September 1992 exchange-rate crisis illustrates the potential cost of an exchan
43、ge-rate target. France, which continued to peg to the mark and was thus unable to use monetary policy to respond to domestic conditions, found that economic growth remained slow after 1992 and unemployment increased. The United Kingdom, on the other hand, which dropped out of the ERM exchange-rate p
44、eg and adopted inflation targeting (discussed later in this chapter), had much better economic performance: economic growth was higher, the unemployment rate fell, and yet its inflation was not much worse than Frances. In contrast to industrialized countries, emerging market countries (including the
45、 so-called transition countries of Eastern Europe) may not lose much by giving up an independent monetary policy when they target exchange rates. Because many emerging market countries have not developed the political or monetary institutions that allow the successful use of discretionary monetary p
46、olicy, they may have little to gain from an independent monetary policy, but a lot to lose. Thus, they would be better off by, in effect, adopting the monetary policy of a country like the United States through targeting exchange rates than by pursuing their own independent policy. This is one of th
47、e reasons that so many emerging market countries have adopted exchangerate targeting. Nonetheless, exchange-rate targeting is highly dangerous for these countries, because it leaves them open to speculative attacks that can have far more serious consequences for their economies than for the economie
48、s of industrialized countries. Indeed, as we saw in Chapters 8 and 20, the successful speculative attacks in Mexico in 1994, East Asia in 1997, and Argentina in 2002 plunged their economies into fullscale financial crises that devastated their economies. An additional disadvantage of an exchange-rat
49、e target is that it can weaken the accountability of policymakers, particularly in emerging market countries. Because exchange-rate targeting fixes the exchange rate, it eliminates an important signal that can help constrain monetary policy from becoming too expansionary. In industrialized countries, particularly in the United States, the bond market provides an important signal about the stance of monetary policy. Overly expansionary monetary policy or strong political pressure to engage in overly expansionary monetar
