It is often claimed that inflation targeting , to be successful, needs to include a high degree of exchange rate flexibility, with the policy rate geared to stabilizing inflation and the exchange rate allowed to fluctuate freely. But a new paper from the IMF examines the case for using two policy instruments—the policy interest rate and sterilized foreign exchange market intervention—in emerging market countries aiming to maintain low inflation while avoiding the damage that large and abrupt currency movements may engender. It argues that in a world of volatile capital movements, and sharp ups and downs in exchange rates, there are important benefits to making use of all available policy instruments, both from a single country’s perspective, and from a global standpoint. Provided policymakers are clear about their objectives, there is no conflict between an inflation targeting framework and making use of the foreign exchange market intervention instrument to attenuate deviations of exchange rates.
Latin America has enjoyed tremendous economic dynamism and a rising quality of life over the past decade. But the region’s transformation is not yet complete. Leaders across the region should capitalize on today’s favorable conditions, transforming their countries to the next level, and ensuring that the benefits of growth are more widely shared. The question is: how best to do that? As I travel through the region next week—visiting Panama, Uruguay, and Brazil—I’m looking forward to hearing the views of government officials, parliamentarians, and university students on the key challenges facing their countries today.
I am in Asia this week to launch our October 2010 Regional Economic Outlook: Asia and Pacific (REO) in Jakarta and Singapore. As I have inevitably found during visits to Asia over so many years, the mood here is confident about future economic prospects. Yet it is also watchful for risks that may be lurking over the horizon. This mood matches closely the main messages of our current assessment of the outlook for the region. In the first of several blogs posts from the region, here I reflect on the self-sustaining recovery under way across Asia, the risk external risk factors and, the pressing issue for Asian policymakers, policy options for managing the tide of large capital inflows.
The crisis exposed fundamental weaknesses in many areas of the world economy, the most obvious being dramatic deficiencies in the regulation and supervision-nationally and internationally-of financial institutions and markets. On the bright side, the crisis provided the impetus for a major overhaul of the financial regulatory system. So, are we making the most of this opportunity to fix the system? A new Staff Position Note, Shaping the New Financial System, examines just how far we’ve come and, more importantly, how much further we have to go. The good news is that policymakers have made important progress in some areas, and the work underway is moving in the right direction. The bad news is that we are barely half way there and the hardest part may lie ahead. Indeed, unless there is concrete progress over the next 12 months in a few key areas, we may well sow the seeds of the next financial crisis.