Lecturer: Kenneth Kuttner (bio)

Summary

The practice of central banking has, in many respects, changed a great deal in recent years. Twenty years ago, monetary policy typically centered on the control of the money supply or the maintenance of an exchange rate peg—and policy decisions were almost always cloaked in mystery. Today, central banks tend to formulate policy with reference to an inflation objective, either explicit or implicit; although exchange rate stability remains an important consideration in many countries. At the same time, monetary policy has become much more “transparent”: most central bankers now view the communication of their policies to the public as a critically important element of the policy process.

This year’s discussion groups will focus on some of the ways in which central banks’ monetary policy frameworks have evolved, emphasizing changes in the choice of the nominal anchor for monetary policy and the trend towards greater transparency. The goals are not only to describe the changes that have taken place, but also to understand the reasons for those changes—and to anticipate the ways in which monetary policy frameworks are likely to evolve in the years to come.

Advance preparation and reading
Participants should do two things to prepare for the discussion groups. The first is to read the following selection of articles relevant to the discussion group topic. (All are available online via the links in this document.)

• An excellent overview of monetary policy frameworks, and the considerations that go into choosing that framework, is the essay by Maxwell Fry, “Key issues in the Choice of Monetary Policy Framework” (published in Mahadeva and Sterne., Monetary Policy Frameworks in a Global Context). A differing, but complementary, perspective on the topic can be found in the IMF working paper by Mark Stone and Ashok Bhundia, “A New Taxonomy of Monetary Regimes” (IMF Working Paper 04/191).

• Focusing narrowly on exchange rate policy, the recent paper by Aasim Husain, Ashoka Mody, and Kenneth Rogoff, “Evolution and Performance of Exchange Rate Regimes” (IMF Working Paper 03/243) documents the evolution of de facto exchange rage regimes over the past six decades. (This is a very long paper; participants may, if they wish, read only pages 1–24.)

• Finally, a pair of papers by Kenneth Kuttner and Frederic Mishkin, “A Snapshot of Inflation Targeting in its Adolescence,” and “Can Central Bank Transparency Go Too Far?” discuss recent trends in inflation targeting and central bank transparency. (Both papers appeared in a volume published by the Reserve Bank of Australia in 2004.)

Second, each participant should become familiar with the key features of his or her own country’s monetary policy framework: particularly, the choice of nominal anchor, the central bank’s objectives (implicit or explicit), its institutional status, and its modes of communication. This information will be used as a point of departure for the group discussions following the lead-off presentation. The International Monetary Fund publishes a helpful table of exchange rate regimes and monetary policy frameworks, but its summary omits many details. Below are examples of country-specific information on monetary policy frameworks available from central banks’ web sites that will be helpful in preparing for the group discussions. (These examples need not be read in detail by all participants, of course.)

• The European Central Bank’s monetary policy framework is summarized here on its web site. An explanation of the ECB’s 2003 modification of its framework can be found in the June 2003 Monthly Bulletin, pages 80-92.

• The Bank of Japan announced in this March 9 press release the introduction of a new framework for monetary policy, replacing the “quantitative easing” framework that had been in place since 2001.

• The monetary policy framework of the Norwegian central bank (Norges Bank) is very clearly laid out here on its web site.

• The Bank of Thailand makes available here on its web site a summary of how its monetary policy framework has evolved since 1942.

• The current monetary policy framework of the Central Bank of Nigeria is summarized here on its web site, and described in more detail in this online document.

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