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Over the past two decades, many low- and lower-middle income countries (LLMICs) have improved control over fiscal policy, liberalized and deepened financial markets, and stabilized inflation at moderate levels. Monetary policy frameworks that have helped achieve these ends are being challenged by continued financial development and increased exposure to global capital markets. Many policymakers aspire to move beyond the basics of stability to implement monetary policy frameworks that better anchor inflation and promote macroeconomic stability and growth. Many of these LLMICs are thus considering and implementing improvements to their monetary policy frameworks. The recent successes of some LLMICs and the experiences of emerging and advanced economies, both early in their policy modernization process and following the global financial crisis, are valuable in identifying desirable features of such frameworks. This paper draws on those lessons to provide guidance on key elements of effective monetary policy frameworks for LLMICs.
the adaptation of the institutional settings of monetary policy to deal with an emerging market economy had to be carried out in the midst of an unprecedented stabilization effort and, therefore, was particularly urgent and complicated. In many of the transition countries, the transformation effort implied not just changes in procedures but the establishment of a central bank from scratch, a process that involved an important effort, precisely at a time when the whole system was in serious turmoil. While the process of reforms is not yet completed in all the transition countries, an immense amount of progress has been achieved, and many of the transition countries face today monetary and central banking conditions that are close to those of Western economies. In this volume, we collect a number of important contributions that discuss the most burning aspects of the current debates on central banking and monetary policy and draw implications for the postsocialist transition economies. The various papers included in the volume deal with a broad set of related issues, which are highly relevant not just for transition economies but for other emerging markets and for advanced economies as well. The subjects covered in the book are divided into seven major categories (Sections II to VIII), some of which overlap.
The more advanced Central and Eastern European Countries (CEECs) face an evolving set of considerations in choosing their exchange rate policies. On the one hand, capital mobility is increasing, and this imposes additional constraints on fixed exchange rate regimes, while trend real appreciation makes the combination of low inflation and exchange rate stability problematic. On the other hand, the objectives of EU and eventual EMU membership make attractive a peg to the euro at some stage in the transition. The paper discusses these conflicting considerations, and considers the feasibility of an alternative monetary framework, inflation targeting.
January 1997 In transition economies monetary stability goes hand in hand with adjustment in the real sectors. Subsidies and central bank support of public enterprises to help maintain employment and output are ultimately financed by creating money, reducing the options for market-based monetary policy regardless of how market-oriented the monetary system. De Melo and Denizer examine monetary policy in 26 transition countries in Europe and Central Asia from 1989 to 1995. In a socialist economy money and credit are largely determined as a residual. In a market economy monetary policy plays an active role in economic management and economic efficiency is believed to be improved by variety and sophistication in financial instruments. De Melo and Denizer classify these 26 countries by the extent of market orientation in the use of instruments of monetary policy, by indicators of policy stance, and by broad measures of effectiveness. They evaluate these three dimensions by cross-country comparison over the transition period and at the time of stabilization. They find several clear patterns. By the end of 1994 slightly fewer than half the countries were relying mainly on market-oriented monetary instruments. More than half exhibited low to moderate reliance on them. Countries that quickly formulated a monetary policy response after the break from central planning were more likely to switch to market-oriented instruments. Central and Eastern European countries moved more rapidly than countries of the former Soviet Union toward these instruments. The use of credit ceilings was helpful in the year of stabilization, especially in the Central and Eastern European countries. The elimination of credit controls was associated with effective stabilization. Policy stance, as measured by base money growth and the real discount rate, was effective in helping to reverse undesirable inflation and disintermediation trends. But the relationship between effectiveness and market orientation of monetary policy instruments is less clear. Financial depth is associated with the elimination of credit ceilings and the development of markets for government paper, and inflation is associated with the elimination of directed credit and the establishment of a market-oriented refinancing window. The overall index of the market orientation of monetary policy instruments is negatively related to inflation, but the direction of causality is unclear. On balance, inflation control and financial depth seem to be more directly related to policy stance, which is in turn related to broader structural reform. Monetary stability goes hand in hand with adjustment in the real sectors. Subsidies and central bank support of public enterprises to help maintain employment and output are ultimately financed by creating money, reducing the options for market-based monetary policy regardless of how market-oriented the monetary system. This paper - a product of the Public Economics Division and the Macroeconomics and Growth Division, Policy Research Department - is part of a larger effort in the department to provide a comparative overview of the progress in transition from a planned to a market economy.
In the 1990s, the issues of central banking and central bank independence have gained increasing attention, in part owing to the role of the future European central bank, but also owing to the emergence of transition countries and the role of central banks in these countries. The main focus of the paper is on the preconditions of disinflation and successful stability policy in transition countries, paying special attention to the institutional requirements and to the choice of nominal anchors.
This important contribution to comparative economic history examines different countries' experiences with different monetary regimes. The contributors lay particular emphasis on how the regimes fared when placed under stress such as wars and or other changes in the economic environment. Covering the experience of ten countries over the period 1700SH1990, the book employs the latest techniques of economic analysis in order to understand why particular monetary regimes and policies succeeded or failed.
Central banks in emerging and developing economies (EMDEs) have been modernizing their monetary policy frameworks, often moving toward inflation targeting (IT). However, questions regarding the strength of monetary policy transmission from interest rates to inflation and output have often stalled progress. We conduct a novel empirical analysis using Jordà’s (2005) approach for 40 EMDEs to shed a light on monetary transmission in these countries. We find that interest rate hikes reduce output growth and inflation, once we explicitly account for the behavior of the exchange rate. Having a modern monetary policy framework—adopting IT and independent and transparent central banks—matters more for monetary transmission than financial development.
This book explores the disastrous economic consequences of pseudo lending for pseudo reforms that occurred when the IMF, as a representative of the West, pretended to aid the transition economy of post-communist Russia through stabilization while the Russian government promised reforms.
This book by a leading authority on monetary policy offers a unique view of the subject from the perspectives of both scholar and practitioner. Frederic Mishkin is not only an academic expert in the field but also a high-level policymaker. He is especially well positioned to discuss the changes in the conduct of monetary policy in recent years, in particular the turn to inflation targeting. Monetary Policy Strategydescribes his work over the last ten years, offering published papers, new introductory material, and a summing up, "Everything You Wanted to Know about Monetary Policy Strategy, But Were Afraid to Ask," which reflects on what we have learned about monetary policy over the last thirty years. Mishkin blends theory, econometric evidence, and extensive case studies of monetary policy in advanced and emerging market and transition economies. Throughout, his focus is on these key areas: the importance of price stability and a nominal anch fiscal and financial preconditions for achieving price stability; central bank independence as an additional precondition; central bank accountability; the rationale for inflation targeting; the optimal inflation target; central bank transparency and communication; and the role of asset prices in monetary policy.