This article formed a part of the consideration to grant the completion of my Bachelors degree. Specifically the module Monetary and Financial System at the University of Technology, Jamaica, School of Business Administration.

1. 1
THE EMERGENCE of MONETARY POLICY IN JAMAICA:
Influenced by Endogenous and Exogenous Forces
Priesnell Warren
BBA: Finance and Banking and Economics
Prepared
April 9, 2013
Abstract
Jamaica is a young developing nation which became independent
in 1962. Most of her structures and polices were adopted from
Great Britain. This research highlights and seeks to enlighten
readers about the monetary policy framework that was
implemented and established during the post-independence era.
Jamaica’s monetary policy was strongly influenced by both
political priorities and the policy directives of multilaterals1
.
During the 1960’s, the Government of Jamaica (GOJ) created the
Bank of Jamaica (BOJ) in order to better manage its monetary
policy tools, a change from what was known as the currency board.
Jamaica has survived a very depressed economic state of being
since its years of independence. The country continues to see
sporadic periods of growth which is not enough to achieve
development. Hopefully, continuous research and understanding of
what went wrong will be the impetus for corrective measures to be
taken for sustainable growth and development.
1
The term Multilaterals is used as reference to global financial agencies such as
the International Monetary Fund, the World Bank and the Inter-American
Development Bank.

2. 2
The GOJ and BOJ must act solely as facilitators; monitoring the
financial intermediaries which will be the brokers for the private
sector and the general populace. This role is absolutely necessary
for stability and economically sustainable growth.
Counter Productive Administrations
Jamaica’s economic policy was geared towards privatization,
devaluation, and liberalization following the Bretton Woods era2
.
As a result, these policies where heavily influenced by multilateral
agencies such as the IMF and the World Bank. However, the
Michael Manley lead administration at the time began promoting
public ownership of entities, establishing one of the largest public
sectors in the Caribbean (Hanratty, 1987). The administration’s
policies included social programmes, funded primarily by taxes on
the bauxite mining sector. This decision forced investments
elsewhere, such as Brazil, Australia and Guinea (Hanratty, 1987).
Consequently, Jamaica developed serious BOP3
issues and was
forced to turn to the IMF in 1976; eventually garnering an
agreement in 1977, which was then re-engineered in 1978, and
1979 (Hanratty, 1987).
It was these funding arrangements that ultimately influenced the
intermediate targets within monetary policies that ensued.
Monetary policy took the form of currency devaluation, with the
motive being expected competitiveness of exports relative to
imports. In theory this was true but failed in Jamaica’s reality,
2
The Bretton Woods was the first system developed in 1944 used to control the
value of money between different countries. It meant that each country had to
have a monetary policy that kept the exchange rate of its currency within a
fixed value.
3
Balance of Payments refers to an accounting record of all monetary
transactions between a country and the rest of the world.

3. 3
leading to several disruptions between the administration and the
IMF.
A change of administration in October 1980, sought to embark on
a new programme backed by the multilaterals; contrastingly, their
policies were geared towards privatization. At the time, Jamaica
went through a period of rapid political instability; which lead to
the pullout of large corporations such as Exxon Corporation from
Jamaica (Hanratty, 1987). Also, the new government sought to
reduce the budget deficit primarily through public sector lay-offs,
divestments of public entities, and by drastically reducing the
previous administration’s installment of social programmes. As
such, policy goals of price stability and stable growth continued to
fail.
Monetary policy at this time was under tight controls, with high
interest rates hindering an increase of investments. Slow or
negative growth remained for an extended period, with only a
glimmer of hope coming in 1986. In fact, the reduction in debt was
only partially successful; as at this time it became obvious that
there was no short term solution for the deep recession of the
1980’s. As the decade continued, increased debt, high
unemployment rates, and problems of wealth distribution
continued to be Jamaica’s major economic problems. These were
especially fueled by adverse trends in the international macro-
economy. A theory became a fact; small open economies like
Jamaica are adversely impacted by large-well developed countries.
By 1986, the political policy changed with a new government
administration; although the overall goals were the same, the
ideologies remained vastly different. Moreover, the linkages
between the policy variables were not properly administered. This
ultimately led to further economic hardship.

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The Developing Financial Sector
The matter of monetary policy has been debated in the Caribbean
since the 1950’s (R.Thomas, 1990). Such that, concerns were
raised about the arrangements made by the monetary authority at
the time, which was the Currency board4
. The board’s policies had
major implications for aggregate demand and balance of payments.
At this point monetary policy was of growing importance in the
country. During the recession of the early 1980’s, monetary policy
became a major objective of economic policy. This was necessary
for the purpose of economic stabilization (Price stability), in a
volatile macro-economic environment. In contrast, monetary
policy previously played only a contingency role in relation to
fiscal policy, which was usually the main objective used in a
government’s economic policy package.
The Bank of Jamaica was established in 1960 as Jamaica’s central
banking authority (Sandra W. Meditz, 1987). It replaced the
Currency board, which showed a lack of authority to control and
support monetary policy. The BOJ’s mandate was to issue
currency, regulate the banking system, set required ratios, adjusted
liquidity ratios, establish discount rates and control credit creation
by banks (Sandra W. Meditz, 1987). As a direct result of the
government’s forced policies, the central bank pursued a restrictive
credit policy to lower aggregate demand in the 1980’s.
The lawmakers contracted the economy; rather than implementing
policies for growth by way of real variables. This contractionary
monetary policy was facilitated through instruments of high
reserves and liquidity ratios, which in 1985 required commercial
4
The Currency board referred to the monetary authority which was required to
maintain a fixed exchange rate against foreign currency.

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banks to retain 50% of their assets in short term instruments
(Sandra W. Meditz, 1987). In addition, the term-structure of
interest rates was also maintained at high levels; this was 23% by
year end (Sandra W. Meditz, 1987). Moreover, the devaluation of
Jamaica’s currency was done several times during the 1980’s with
the aim of achieving favourable balance of payments. Conversely,
it did not; as foreign raw material imports became more expensive
and local production became uncompetitive both at home and
abroad.
The BOJ commenced its open market operations5
in an effort to
stabilize the economy with the creation of Certificate of Deposits
(R.Thomas, 1990). In spite of these efforts, the fundamental
variables which determined the level of success in achieving
stability had not changed. There continued to be problems reflected
in respect to the government’s balance of payments and general
price stability.
The Impact of Financial Institutions
Commercial banks were reluctant to create medium to long-term
financing during the 1980’s, which influenced the government to
create several banks should foster economic development. These
were National Development Bank of Jamaica, Jamaica Mortgage
Bank, Agricultural Credit Bank, Jamaica Industrial Development
Corporation, Small Business Board, along with the Workers
Savings and Loans Bank. These offered relatively favourable rates
in relation to the commercial banks, and offered technical
assistance as well.
5
Open Market Operation is an activity by a central bank to buy or sell
government securities on the financial market. Today they are used as the
primary means of implementing monetary policy.

6. 6
In light of this, Jamaica’s financial system was rapidly expanding,
as the number of financial institutions more than doubled to over
forty since 1962. Eight commercial banks existed by 1985, most of
which were foreign owned. Barclay’s Bank was the first in 1836,
and was purchased by the government and renamed NCB in the
1970’s. Three Canadian Banks along with American banks such as
City and Chase Manhattan were also operating. During the 1980’s
up to 63% of private sector assets were been managed by
commercial banks. Life insurance companies, building societies,
trust companies, and merchant banks were also prominent on the
Jamaican landscape (Sandra W. Meditz, 1987). These institutions
cumulatively accounted for the remaining 37% of the sectors
monetary assets. Important to note, that despite the rapid growth of
the financial sector, rapid growth through means of capital
spending did not occur. These financial assets financed
government debt, creating a crowding out effect for private
investment spending.
The Introduction of Alternative Financing
The Jamaica Stock Exchange (JSE) was incorporated in August
1968 under the directive of the Bank of Jamaica (Jamica Stock
Exchange, 2009). Initially only a few companies traded on the
exchange, this was as a result of the form and structure of
businesses that predominantly existed in Jamaica (Sandra W.
Meditz, 1987). These were the Annett & Company Limited,
Capital Market Services (JA) Ltd, Edward Gayle & Company Ltd,
and Pitfield McKay Ross & Co Ltd (Jamica Stock Exchange,
2009). However, the exchange grew vastly during the 1980’s; as
companies sought to avoid the high interest rates from debt
financing. Generally, the stock exchange is a source of direct
investment for stability and growth of a country. Hence, the
operation of an efficient stock market is a channel for attracting

7. 7
foreign investors, creating the stability of Jamaica’s currency
(Haughton, 2013).This is as a result of inflows of foreign currency,
which increases the supply relative to the demand of currencies,
which may result in a stable exchange rate. To date, major
improvements have been made to the existing structures at the JSE,
but it remains less desirable when compared globally.
Currencies in Circulation
The Jamaican dollar became a legal tender in the year 1969, when
it replaced the Jamaican pound (Sandra W. Meditz, 1987). Due
primarily from a heavy reliance on the tourism industry, currencies
such as the Canadian dollar, US dollar and British pound sterling
were also circulated. At this time, the US dollar was the most
stable and competitive, as a result, most hotels quoted their prices
in same. Before 1973, the Jamaican dollar was traded against the
British pound sterling; until it was traded against the American
dollar. This marked the beginning of a major slide for the Jamaican
dollar, it moved from being one of the Caribbean’s strongest
currencies to one of the weakest. Further to this, the Jamaican
dollar declined by more than 68% in 1991 in relation to the US
dollar; while inflation and interest rates rose by more than 51% and
76% respectively (Ghartey, 2003).
Adjustments of the Financial Sector
The years 1990 to 1994 saw money supply growth averaging 42%
of GDP (Ghartey, 2003). The effective reserve ratio6
and the
currency-monetary base ratios7
averaged approximately 30% of
GDP confirming a depressed Jamaican economy. At this time, the
GOJ was settling debt by way of Seigniorage8
. The huge variance
between the spread of interest with respect to savings and loans
6
The ERR is defined as a legal reserves on a portion of total deposits.
8
Seigniorage refers to the excess money supply that creates an inflationary
expense lowering payments in favour of the government.

8. 8
meant that private individuals paid the major portion of
Seigniorage. The Fiscal deficit in relation to GDP increased on an
average of approximately 5% between 1992 and 1994 (Ghartey,
2003). While, bank reserve ratios also elevated leading to an
increase of 43% on Treasury bill rates, which meant the lending
rate would have been at a similar level. The result, an increase of
borrowing from the international market which caused a negative
impact on Jamaica’s debt burden.
In contrast, many financial institutions made supernormal profits
due from high inflation, interest rates, as well as devaluation of the
dollar by the mid 1990’s. However, problems of moral hazard and
adverse selection had deteriorated most of their profits. Following
other bad decisions, several financial institutions became bankrupt
due from non-performing assets under their management. The
financial market subsequently collapsed leading to the creation of
FINSAC9
in 1999. In 2001, the debt burden from FINSAC stood at
$120 billion, while the domestic debt rose to $495 billion.
Moreover, Jamaica suffered a recession during the period,
recording higher inflation rates and negative growth.
The Last Decade
The money supply was instituted mainly by open market operation
and reserve requirements. The GOJ tried desperate measures to
recover from the FINSAC meltdown, only to encounter the 2007
global meltdown; successfully growing Jamaica’s unsustainable
debt. The perpetual use of debt financing to finance debt, such that
the burden has past one Trillion; hindering the objectives of price
stability and economic growth. Jamaica entered into an agreement
with the IMF in 2010, instituting an unprecedented JDX
9
The Financial Sector Adjustment Company was instated by the GOJ to save the
financial sector.

9. 9
programme10
. The lack of reform and poor management of the
economic policy package led to a NDX (JDX2)11
. This fiscal
situation has lead to a shift in investor confidence which has now
left Jamaica on a difficult path to stability. A primary example of
the limited confidence regarding the sliding Jamaican dollar, is the
use of an OMO instrument by BOJ that opened on April 9, 2013,
that was denominated in USD.
Conclusion and Recommendations
Monetary policy has become the main policy objective in the
Government of Jamaica’s economic policy package. However, the
implications of monetary policy and the overall goals of economic
policy must be properly researched, forecasted and implemented
based on the contingencies that exist in Jamaica. In other words
directives which have served well for other developing countries
may fail in Jamaica’s context.
Further research will be necessary to prevent further deterioration
of the fragile economic domain. With monetary policy as the main
tool, the policy package must be well-designed so as to have a term
structure of positive effects. Moreover, the government should
institute a policy which uses the time value techniques (Time value
of money) for the attainment of short-term, medium term, and most
importantly, long term positive trends of stability and growth. It is
important to note, that if the government’s policies are not
supported by the private sector, civil society groups, and the
population; all these problems will only be treated in the short-
term, only to reoccur thereafter.
10
The Jamaica Debt Exchanged is a debt management/monetary policy that
involved a restructure of GOJ debt maturities.
11
National Debt Exchange is a change of name for the principles used in the
JDX.

10. 10
Reference
Bank of Jamaica. (2013, April 8). http://www.boj.org.jm/.
Retrieved May 16 from http://www.boj.org.jm/:
http://boj.org.jm/uploads/news/boj_omo_press_release_08_
april_2013.pdf
Ghartey, E. E. (2003). Monetary policy and Deficts Financing
Jamaica. Journal of Economic Development, 83.
Hanratty, S. W. (1987). Caribbean Islands: A Country Study; Role
of Government . Retrieved from GPO for the Library of
Congress: http://countrystudies.us/caribbean-islands/27.htm
Haughton, A. (2013, May 8). What does the IMF agreement mean
for Jamaica? ( A. Haughton, Presenter) The Undercroft,
UWI, Mona, Kingston, Jamaica.
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from http://www.jamstockex.com/index.php:
http://www.jamstockex.com/controller.php?action=about_e
xchange
Thomas, R. (1990). Costs and constraints in The Application of
Monetary Policy jamica in the 1970's and 1980's.
Department of Econmics, University of the West Indies, 1-
2.
Sandra W. Meditz, D. M. (1987). Caribbean Islands: A Country
Study;Banking, Financial Services, and Currency.
Retrieved from GPO for the Library of Congress:
http://countrystudies.us/caribbean-islands/32.htm