Coordination Among BRICS Central Banks for Monetary Policy- Why the Need But Why So Difficult?

1. Coordination Among BRICS Central Banks for Monetary Policy- Why the Need But Why So Difficult? Jeevan Khundrakpam Meeting of BRICS Economics Research Group NIPFP, February 27, 2012

2. Why Coordination is Important? • Economies are increasingly getting integrated through various channels (trade, finance, etc) • Economic policies have spillover effects, positive as well as negative • eg., QE2 in the US & large capital inflows to EMEs • Negative (threat to price and financial stability, commodity price volatility) • Positive (improvement in US economy and benefit to EMEs)

3. Do Spillovers Necessitate Coordination? • Is an ongoing debate in theoretical analysis • Pre-New Open Economy Macroeconomics (NOEM) • significant gains from monetary coordination • NOEM framework • little gains from coordination (Obstfeld and Rogoff, 2002) • Subsequent models with generalized specification –significant gains from coordination • However, monetary policy coordination in practice has not been always forthcoming

4. Economic Diversity can make Monetary Policy Coordination Difficult Different exchange rate regimes further complicates coordination

5. BRICS Monetary Policy Frameworks Diverge

6. Divergence in CPI Inflations

7. Incomplete Synchronization of Policy Rates

8. Economic Linkage is Increasing • Increasing synchronization of business cycle among BRICS and between BRICS with AEs • Increasing trade linkages among BRICS- advanced economies still major trading partners • Financial Sector linkages (Portfolio, FDI) of BRICS- mostly with advanced economies • Thus, domestic monetary policy in BRICS has to take cognizance of the strong inter-connectedness with advanced economies

9. Common Monetary Policy Concerns • Some common set of issues relevant to monetary policy have emerged such as, • Managing large and volatile capital inflows • Maintaining stable economic environment for high growth & economic development • Addressing global commodity price volatility • Concern on inadequate global safety measures in case of simultaneous crisis in BRICS • Can these common concerns be better addressed through monetary coordination?

10. Monetary Coordination- What are the Challenges? • Easier during crisis period – national objectives converge • Normal times coordination could be difficult • Divergence in monetary policy objectives • Potential conflict with national interest • The exit from crisis – as an example • Effective coordination most likely “in the context of broad comity among nations” (Eichengreen, 2011)

11. Monetary Coordination- What are the Challenges? • Linkages need to be understood properly through research • Similarly, spillover needs to be assessed and quantified • A beginning by IMF, 2011 for 5-systemic economies • A similar and more needs to be done for BRICS • Need to develop a framework for monetary coordination • Addressing fiscal dominance in individual countries is fundamental • May involve fiscal coordination, which is difficult • Need to develop a code of discipline to safeguard the framework • But imposing the code of discipline will be a challenge –more so if diverse interests are involved

12. Thank You