Comments: “Inflation Targeting Framework for Jamaica: An Empirical Exploration”

1. Comments: “Inflation Targeting Framework for Jamaica: An Empirical Exploration” Myriam Quispe-Agnoli Federal Reserve Bank of Atlanta Conference on Inflation Targeting October 4 –5, 2004

2. Objective of the paper • Is inflation targeting (IT) an effective framework for monetary policy in Jamaica?

3. Paper Structure • Monetary Policy in Jamaica since 1990. • Literature review comparing the IT experience of developed and developing countries. • Review of the fundamental requirements for IT in Jamaica. • Discusses the implementation of IT in Jamaica.

4. Comments’ Outline • I will follow the outline of the paper for my comments: • First, I will look at the preconditions for inflation targeting (IT) followed by questions on specific topics • Second, I will discuss the some issues on IT design and implementation • Finally, I will bring general questions

5. Suggested list of preconditions before adopting IT • Central bank independence (CBI). • Macroeconomic stability. • Financial system stability. • Other institutional elements.

6. Preconditions for IT in Jamaica • Does the Central Bank have a reasonable degree of operational independence to ensure flexibility in monetary policy towards achieving the inflation target? Central Bank is independent but… • There is no law that prohibits public financing • Political independence is limited by the presence of government representatives on the board

7. Some Questions Regarding Central Bank Independence • Table to compare CBI estimates of IT developing countries and Jamaica. • What do you think about CBI during the monetary targeting period, 1996-2002? • What can the financing of the fiscal deficit tell us about CBI?

8. Preconditions for IT in Jamaica • Is monetary policy influenced by public sector borrowing from the bank? • Between 1994 and 1998, heavy reliance on seigniorage for public financing. • In subsequent years, external borrowing was the main source for public financing. • However, fiscal imbalances remain at high levels.

9. Some Questions Regarding Fiscal Dominance • Fiscal imbalances might limit or restrict the credibility of future IT in Jamaica • Is there a plan to implement tax reform or an effort to reorganize government expenditures in Jamaica? • Do you think that the domestic capital market might become an alternative source for public financing?

10. Preconditions for IT in Jamaica • A flexible and independent monetary policy requires a “deep” financial system that is an alternative source for public financing. • According to the paper, there is a well functioning financial market in Jamaica. • Competitive interest rates, no financial repression. • Diversified instruments for savings and investment.

11. Some Questions Regarding Financial Depth • Could you tell us about the performance of private credit by banks as percentage of GDP? • Is there a regulatory and supervisory institution for the banking system? • What is the size and performance of the stock and bond market? • Is the financial system deep enough to absorb the placement of public debt?

12. Issues of IT design and implementation • Bosede analyzes the appropriate inflation index to use for IT, concluding that either core or headline inflation could be used as the relevant price index. • The author also uses a VAR model to show the effect of different inflation target horizon and the bandwidth on the stability of monetary policy. • Conclusion: a 24-month horizon is the adequate for a successful IT implementation.

13. General Questions • Given external shocks, is the Central Bank's commitment to price stability as a primary goal credible? • What is the import component of the price index? • What is the level of the dollarization degree of the financial system? • Is there an effort to coordinate fiscal and debt management policies? • What is the likelihood of new legislation to protect Central Bank independence?

14. Some Macroeconomic Indicators