Presentation: Monetary policy frameworks in EMEs: practice ... · 01 03 05 07 09 11 13 15 17 19 %...
Transcript of Presentation: Monetary policy frameworks in EMEs: practice ... · 01 03 05 07 09 11 13 15 17 19 %...
Monetary policy frameworks in EMEs: practice ahead of theoryClaudio BorioHead of the Monetary and Economic Department 89th Annual General Meeting
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One question, three takeaways
Why combine IT with FX intervention and macroprudential measures?
Three takeaways
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help
3
Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help
4
EMEs adopt inflation targeting but not free floating Inflation targeting regimes rise... …but so do FX reserves Use of macroprudential tools
0.0
0.6
1.2
1.8
2.4
02 04 06 08 10 12 14 16 18
//
USD trn
0
5
10
15
20
02 04 06 08 10 12 14 16 18
Inflation targeting EMEsInflation targeting AEs
# of measures
0
20
40
60
80
01 03 05 07 09 11 13 15 17
%
Inflation targetingFX anchor
EMEs: Other
5
Inflation, growth and credit in inflation targeting economiesInflation Real GDP growth Real credit growth
–2
0
2
4
6
8
10
01 03 05 07 09 11 13 15 17 19
%
–7.5
–5.0
–2.5
0.0
2.5
5.0
7.5
01 03 05 07 09 11 13 15 17 19
%
EMEs AEs
–8
–4
0
4
8
12
16
02 04 06 08 10 12 14 16 18
%
6
EMEs face large exchange rate and capital flow swings
–40
–20
0
20
–200
–100
0
100
00 02 04 06 08 10 12 14 16 18
% USD trn
Real exchange rate, EMEs (lhs) Net capital inflows to EMEs (rhs)
7
Exchange rate pass-through is higher in EMEs
–0.3
0.0
0.3
0.6
02 04 06 08 10 12 14 16 18
% pts
EMEs
AEs
8
Financial markets are not as developed in EMEs as in advanced economies
0
150
300
450
ID TR RU IN MX BR CL KR ZA AU CA GB
% of GDP
EMEs
Size of institutional investors Trading in FX derivatives
0
10
20
30
ZAR
HU
FCZ
KTR
YM
XN PLN
CLP
THB
KRW
BRL
RUB
COP
PHP
PEN
INR
IDR
NZD
AUD
GBP SE
KN
OK
CAD
% of GDP
AEs
9
Roadmap
EMEs are more sensitive to capital flows and exchange rates Currency mismatches The financial channel of the exchange rate
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help
10
Foreign currency debt and foreign ownership raise vulnerabilities in EMEsForeign currency debt Foreign ownership in EME local sovereign bond
markets
0
8
16
24
06 08 10 12 14 16 18
% of total
EMEs Asian EMEs Other EMEs
5
10
15
20
0.0
0.6
1.2
1.8
06 07 08 09 10 11 12 13 14 15 16 17 18
% of GDP USD trn
EMEsBy borrower (lhs):
Asian EMEsOther EMEs
USDCHF/EUR/GBP/JPY
By currency (rhs):
11
The self-reinforcing currency mismatch loop
Appreciation
financial conditionsLoosen
Capital inflows
Depreciation
financial conditionsTighten
Capital outflows
12
Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs Stabilising inflation and output at the same time
FX intervention and macroprudential measures can help
13
In EMEs, exchange rate appreciation goes hand in hand with……lower bond yields… …and stronger domestic credit expansion
–0.10
–0.08
–0.06
–0.04
–0.02
0 5 10 15 20 25 30 35 40 45 50
% pts
Spread Risk premium
Days
–0.2
0.0
0.2
0.4
0.6
0 6 12 24 30 36
%
Domestic creditMonths
14
First monetary policy dilemma
15
Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs Stabilising inflation and output at the same time Stabilising the economy today vs stabilising it tomorrow
FX intervention and macroprudential measures can help
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Behaviour of selected variables around crisesCountry group medians, in standard deviations
Advanced economies EMEs
–2
–1
0
1
–16 –12 –8 –4 0 4 8 12
Domestic financial cycle Capital inflows (debt)
–2
–1
0
1
–16 –12 –8 –4 0 4 8 12
Real effective exchange rate
17
Second monetary policy dilemma
18
Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help
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FX intervention mutes the financial channel of the exchange rateFX intervention leans against appreciation, offsetting capital inflows…
....and dampens credit expansion, offsetting the same flows
–0.3
–0.2
–0.1
0.0
0.1
0.2
% pts of GDPImpact on credit growth
Capital flows
–0.3
–0.2
–0.1
0.0
0.1
0.2
Impact on the exchange rate %
FX intervention
20
Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help But FX intervention is no panacea
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Roadmap
EMEs are more sensitive to capital flows and exchange rates
This worsens two potential monetary policy trade-offs
FX intervention and macroprudential measures can help But FX intervention is no panacea Need for a macro-financial stability framework
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Thank you!