High-level workshop by IMF, EBRD and CBA focuses on monetary policy

By Anthony Williams

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A high-level workshop hosted by the International Monetary Fund (IMF), the Central Bank of Armenia (CBA), and the European Bank for Reconstruction and Development (EBRD) in Yerevan on April 27, and in Tshakhkadzor on April 28–29, considered ways to improve monetary policy tools and central bank instruments in support of implementation of a modern monetary framework of inflation targeting (IT). Strengthened IT regimes—which include clear and consistent policy objectives and robust central bank operational independence, communications, and accountability—can help better anchor expectations about future inflation and contribute to dedollarization,stronger local currency markets, reduced uncertainty, and less severe boom-bust cycles.

The workshop brought together representatives from the central banks of Albania, Armenia, Belarus, the Czech Republic, Georgia, Hungary, Kazakhstan, Moldova, Mongolia, Norway, Poland, Russia, Serbia, Tajikistan, and Ukraine, as well as staff from the IMF and the EBRD, and international modeling and forecasting experts. To help frame the discussion, policymakers from central banks with more extensive practice in the application of IT (the Czech Republic, Hungary, and Poland) shared their experiences thus far. The workshop will continue in Tshakhkadzor, April 30–May 6, with a technical segment offering specialized training in the development and use of modeling and forecasting tools in support of an IT regime.

Artur Javadyan, Chairman of the Central Bank of Armenia said, “I am very pleased to have hosted so many regional partners and colleagues. We have had excellent discussions on ways to strengthen monetary policy frameworks and supporting tools and instruments. The recent acceleration of inflation, although driven mainly by global food and fuel price increases, has shown the importance of having well-anchored inflationary expectations and strong communications and tools. We have benefited immensely from the insights of our central bank colleagues and from the discussions with experts from the IMF and the EBRD.”

The main issues explored during the workshop include:

• Challenges faced in introducing IT and the conditions needed prior to introduction of the new framework. Discussions focused on the time it took to introduce full-fledged IT and technical difficulties encountered in analyzing the monetary policy transmission mechanism and in modeling and forecasting inflation.

• The role of the exchange rate under IT, including as part of the transmission mechanism and as a source of shocks. Participants discussed how to model the exchange rate under IT, including the exchange rate pass-through and policy implication of high pass-through, and considered ways other than monetary policy to moderate exchange rate volatility.

• The importance of credibility and accountability in considering which price index to target, which interest rate to use as the policy rate, operational targets and instruments, the policy and forecast horizons, uncertainty, and joint ownership of targets with governments. Participants also considered the decision-making process.

• The tension between flexibility and credibility, particularly in relation to communications to build and maintain credibility and mechanisms for introducing flexibility and managing exceptional circumstances.

“This workshop has deepened our understanding of country experiences in putting in place IT regimes. In particular, it has led to a better appreciation of the challenges involved in pursuing inflation targeting in environments with dollarization, high exposure to food price inflation, and thin financial markets,” said Edward Gardner, the IMF’s Senior Resident Representative in Georgia.

“We have been very pleased with the exchange of views and look forward to next week’s technical seminar,” said Doug Laxton, Advisor in the IMF’s Research Department and co-organizer of the workshop (along with Mark Horton of the IMF’s Middle East and Central Asia Department and Ashot Mkrtchyan of the CBA).

“Inflation targeting, as a modern monetary policy framework, is important for local financial market development. At the same time, the development of local financial markets is a necessary complement to ensure the success of a credible monetary framework. The work together of the EBRD and the IMF with central banks in the region in these areas has great potential for positive synergies,” said Axel Van Nederveen, Treasurer, EBRD.

“The IMF will continue to support Armenia and other countries in the region strengthen their policy capacity and reduce vulnerabilities, including in the financial sector, paving the way to strong and durable growth,” added Guillermo Tolosa, IMF Resident Representative in Armenia.

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