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Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis
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Monetary Policies and Financial Stability: Recent Development and Lessons from the Current Financial Crisis

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Master Thesis (MBA)

Master Thesis (MBA)

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  • 1. Prof. Dr. StefanJungblut Master´s thesis defense in Business Administration Monetary Policies and Financial Stability: Recent Development and Lessons From The Current Financial Crisis Faculty of Business Administration and Economics Department of Economics Prof. Dr. Stefan Jungblut Sherif Elkoumy 20.03.2013
  • 2. Prof. Dr. StefanJungblut  Introduction• Introduction• Monetary  Monetary policy theory – Overview policy theory  Types of monetary policies• Types of monetary  Monetary-aggregate Targeting policies• Inflation  Exchange-rate Targeting Targeting• Monetary  Inflation Targeting Policies and Financial  Flexible Inflation Targeting stability• Conclusion  Montary policies and Finacnial stability  Conclusion 20.03.2013 2
  • 3. Prof. Dr. StefanJungblut  The monetary policies are the central tool of macroeconomic• Introduction stabilization.• Monetary policy theory  Central banks in developed and developing countries have• Types of made great steps in the conduct of monetary policies. monetary policies  Inflation rates have been decreased to levels that are consistent• Inflation with price stability. Targeting• Monetary  Once price stability has been attained, growth rates of the Policies and Financial aggregate economy have been high. stability  The thesis looks at the recent development of monetary policies• Conclusion by studying different monetary policies that allow monetary policy to focus on domestic consideration. 20.03.2013 3
  • 4. Prof. Dr. StefanJungblut  Definition• Introduction  The role of a nominal anchor• Monetary policy  Basic principles of monetary policy theory  Price stability• Types of monetary  Avoiding time inconsistency policies  Alignment of fiscal policy with monetary policy• Inflation Targeting  Forward looking policy• Monetary Policies and  Accountability Financial stability  Central bank independency• Conclusion  Central bank accountability 20.03.2013 4
  • 5. Prof. Dr. StefanJungblut  Definition• Introduction - A process by which the monetary authority controls and• Monetary policy monitors the money supply. theory - It can be either expansionary or contractionary .• Types of monetary policies  The role of a nominal anchor• Inflation - A restriction on the value of domestic money. A single Targeting• Monetary variable central bank use to peg down expectations of Policies and Financial private agents about the nominal price level. stability• Conclusion - Two types of nominal anchor > quantity-based nominal anchor > price-based nominal anchor 20.03.2013 5
  • 6. Prof. Dr. StefanJungblut  Basic principles of monetary policy• Introduction  Price stability• Monetary policy - Low and stable inflation rate provides considerable benefits to theory the economy.• Types of monetary  Avoiding time inconsistency policies• Inflation - Follow short-term objectives results in poor long-term outcomes. Targeting  Alignment of fiscal policy with monetary policy• Monetary Policies and - Irresponsible fiscal policy affects on price stability. Financial stability  Forward looking policy• Conclusion - To metigate long lags from monetary policy.  Accountability - Actions of the government should be publicly monitored. 20.03.2013 6
  • 7. Prof. Dr. StefanJungblut  Central Bank Independence• Introduction - The degree of independency affects on the rate of money• Monetary policy expansion and credit. High levels of independence with a theory• Types of clear mandate for the bank are important to assure price monetary policies stability and a better macroeconomic performance.• Inflation Targeting  Central Bank Accountability• Monetary - Central bank should be subject to government and public Policies and Financial stability supervision. Central banks are required to communicate• Conclusion obviously their monetary policy strategy to illustrate their targets and goals and how they plan to achieve them. 20.03.2013 7
  • 8. Prof. Dr. StefanJungblut  Monetary-aggregate Targeting• Introduction• Monetary  Theoretical framework policy theory• Types of  Advantages and disadvantages monetary policies• Inflation Targeting  Exchange-rate Targeting• Monetary Policies and Financial  Theoretical framework stability• Conclusion  Advantages and disadvantages 20.03.2013 8
  • 9. Prof. Dr. StefanJungblut  Monetary-aggregate Targeting• Introduction  Theoretical framework• Monetary policy theory The strategy includes three main elements:• Types of 1. Depending on information delivered by a monetary- monetary policies aggregate to manage monetary policy.• Inflation Targeting 2. Announcement of targets for monetary-aggregates.• Monetary 3. Accountability mechanism to exclude large and systematic Policies and Financial deviations from monetary targets. stability• Conclusion The strategy focus mainly on the growth of a chosen monetary-aggregate. 20.03.2013 9
  • 10. Prof. Dr. StefanJungblut  Monetary-aggregate Targeting• Introduction  Advantages and disadvantages• Monetary policy theory 1. Authorities reacts quickly to shocks in the domestic• Types of economy. monetary policies 2. Monetary targeting generates instantaneous signals about• Inflation Targeting the status of the monetary policy.• Monetary 3. A solid relationship between the goal and the target Policies and Financial variable must be existed. If this relationship is not stability available between income level, price level and the velocity• Conclusion of money, monetary targets will not be able to convoy clear signals about the stance of the monetary policy. 20.03.2013 10
  • 11. Prof. Dr. StefanJungblut  Exchange-rate Targeting• Introduction  Theoretical framework• Monetary policy theory - The central bank attempts to ensure nominal exchange rate• Types of stability against the currency of a so-called anchor country via monetary policies interest rate changes and direct exchange interventions• Inflation Targeting thereby importing price stability.• Monetary - An adequate level of international reserves is required. Policies and Financial - An appropriate economic policy that ensures a low level of stability inflation differential against the anchor country.• Conclusion 20.03.2013 11
  • 12. Prof. Dr. StefanJungblut  Exchange-rate Targeting• Introduction  Advantages and disadvantages• Monetary policy theory 1. The framework fixes inflation rate for internationally• Types of traded goods, and thus directly takes part to keep inflation monetary policies under control.• Inflation Targeting 2. It anchors inflation expectation by providing an automatic• Monetary rule for the conduct of monetary policy. Policies and Financial 3. It avoids the time-inconsistency problem stability 4. Exchange rate targeting hinders central banks from• Conclusion establishing an independent monetary policy. 5. Exchange rate targeting is probably to stimulate financial fragility in emerging markets countries. 20.03.2013 12
  • 13. Prof. Dr. StefanJungblut  Theoretical approach• Introduction  Inflation targeting framework• Monetary policy theory  Assignment of the target• Types of  Interaction with other policy monetary policies  Definition of target• Inflation  Economic effects of inflation targeting Targeting• Monetary  Drawbacks Policies and Financial  Flexible inflation targeting stability• Conclusion 20.03.2013 13
  • 14. Prof. Dr. StefanJungblut - A practical response to the downfall of the other monetary• Introduction policy strategies. Inflation targeting is a credible nominal• Monetary policy theory anchor for inflation expectations.• Types of monetary policies  Theoretical approach• Inflation “..a framework for monetary policy characterized by the public Targeting• Monetary announcement of official target ranges over one or more time Policies and Financial horizons; low and stable inflation are monetary policy´s primary stability long-run goal; vigorous efforts to communicate with the public• Conclusion about the plans and objectives of the monetary authorities; mechanisms that strengthen the central bank´s accountability for attaining those objectives.” 20.03.2013 14
  • 15. Prof. Dr. StefanJungblut  Inflation targeting framework• Introduction  Assignment of the target• Monetary policy theory  Interaction with other policy• Types of monetary  Definition of target policies • Horizon of the target• Inflation Targeting • Choice of price index• Monetary Policies and • Width of the target band Financial stability • Accountability• Conclusion • Inflation forecasts 20.03.2013 15
  • 16. Prof. Dr. StefanJungblut  Inflation targeting framework• Introduction  Assignment of the target• Monetary policy theory • Who assigns the inflation target – Central bank or Government.• Types of  Interaction with other policies monetary policies • Full employment (in short-run, a tradeoff between the two• Inflation objectives may be occurred, in the long-run, achieving the target Targeting is the best action to full employment objective).• Monetary Policies and • Financial stability should be compatible with the inflation Financial stability targeting framework.• Conclusion • Fiscal policy objectives. Monetary policy requires considering the impact of fiscal policy on the outlook for inflation. Similarly, fiscal policy requires supporting the inflation target. 20.03.2013 16
  • 17. Prof. Dr. StefanJungblut  Inflation targeting framework• Introduction  Definition of target• Monetary policy theory • Horizon of the target (it depends on the inflation rate at• Types of the time of setting inflation target). monetary policies • Level of the target (theoretically, zero inflation is equal to• Inflation price stability, practically, having inflation target above zero Targeting is preferred).• Monetary Policies and • Choice of price index (vary due to the different methods Financial stability in calculating the CPI and the relative sensitivity of the CPI• Conclusion inflation rate to supply shocks). 20.03.2013 17
  • 18. Prof. Dr. StefanJungblut  Inflation targeting framework• Introduction  Definition of target• Monetary policy theory • Width of the target band (should it be a numerical• Types of number or a band?). monetary policies • Accountability (increased accountability of inflation• Inflation targeting allows monetary authority to monitor and improve Targeting the understanding of expectations).• Monetary Policies and • Inflation forecasts (due to its forward-looking nature, Financial stability inflation targeting dynamically uses forecast; therefore, the• Conclusion central bank´s forecasts of inflation are critical). 20.03.2013 18
  • 19. Prof. Dr. StefanJungblut  Economic effects of inflation targeting• Introduction • Inflation targeting has remained within the targeted range or close• Monetary to the target rate. policy theory • Inflation targeting has been successful in controlling inflation.• Types of monetary • Inflation targeting can promote growth and does not lead to policies increased output fluctuations.• Inflation Targeting • Inflation targeting increases accountability which helps• Monetary ameliorates the time-inconsistency problem. Policies and Financial • Increased transparency and accountability under inflation stability targeting helps promote central bank independence.• Conclusion • Inflation targeting can help build credibility and anchor inflation expectations more rapidly and durably. 20.03.2013 19
  • 20. Prof. Dr. StefanJungblut  Economic effects of inflation targeting• Introduction • Inflation targeting grants more flexibility.• Monetary • Inflation targeting includes a lower economic cost in the face of policy theory monetary policy failure.• Types of monetary • Effects on inflation (average inflation has decreased on average, policies fluctuations in inflation have declined).• Inflation Targeting • Effects on growth and business cycle variability (a slight increase in• Monetary the average growth, growth variability has declined generally). Policies and Financial • Effects in interest rates and exchange rates (a decline in inflation stability expectations and the inflation risk premium on nominal interest• Conclusion rates, real exchange rate variations have declined on average). 20.03.2013 20
  • 21. Prof. Dr. StefanJungblut  Economic effects of inflation targeting• Introduction • The performance of inflation targeting strategy over the past 20 yrs.• Monetary policy theory• Types of monetary policies• Inflation Targeting• Monetary Policies and Financial stability• Conclusion Inflation and growth performance (Roger, 2010) Output and inflation smooth (Roger, 2010) 20.03.2013 21
  • 22. Prof. Dr. StefanJungblut  Drawbacks• Introduction • September 2008, central banks that had been depending on• Monetary inflation targeting have not given enough consideration to assets- policy theory price bubbles.• Types of monetary • improper responses to supply shocks and terms-of-trade shocks. policies • Inflation targeting cannot work in countries that do not meet a• Inflation Targeting stringent set of preconditions.• Monetary Policies and  Flexible inflation targeting Financial stability • Set weight on real GDP growth in the short-run, so long as there is a• Conclusion clear longer-term target for CPI inflation. • Inflation targeting should not be a strict inflation targeting but a flexible inflation targeting. 20.03.2013 22
  • 23. Prof. Dr. StefanJungblut  The relationship between monetary policy and financial• Introduction stability• Monetary policy theory • Inflation can be viewed as one of the major factors creating• Types of financial stability in the first place. monetary policies • Monetary policy and financial stability policy are inherently• Inflation connected to one another . Targeting  Assets price bubbles• Monetary Policies and • Asset price movements and asset price bubbles can directly Financial stability endanger financial stability.• Conclusion  Lessons from the crisis • Price stability is not enough to attain financial stability and good flexible inflation targeting by itself does not attain financial stability. 20.03.2013 23
  • 24. Prof. Dr. StefanJungblut • Inflation targeting clearly outperforms both monetary-• Introduction targeting and exchange-rate regime. While the latter suffers• Monetary policy theory from many drawbacks, the former shows an improved• Types of performance in terms of inflation reduction and economic monetary policies conditions.• Inflation • To overcome these severe drawbacks, inflation target should Targeting• Monetary be flexible and gives some weight on real GDP growth in the Policies and Financial short-run, so long as there is a clear longer-term target for CPI stability inflation.• Conclusion • flexible inflation targeting does use all information that is relevant for the forecast of inflation and resource utilization. 20.03.2013 24
  • 25. Prof. Dr. StefanJungblut 20.03.2013 25

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