Choice of Monetary Policy Regime for Catching-Up Economies (Central and Eastern Europe and South-East Asia Cases)

Transcription

1 Mikhail Yu. Golovnin (Deputy Director, Institute of Economics, Russian Academy of Sciences); Alexander Dm. Nekipelov (Dean, Moscow School of Economics, MV Lomonosov Moscow State University); Svetlana Al. Nikitina (PhD Student, Moscow School of Economics, MV Lomonosov Moscow State University) Choice of Monetary Policy Regime for Catching-Up Economies (Central and Eastern Europe and South-East Asia Cases) Abstract The paper deals with the problems of choosing monetary policy framework by emerging and developing economies in globalization context. Theoretically the trend toward corner solutions (inflation targeting framework and hard pegs) is outlined. Central and Eastern European countries confirm this trend, while Eastern and South-Eastern Asian countries rely more on implicit exchange rate targeting and soft pegs. Exchange rate targeting Asian countries showed the best economic performance both in the period of stable economic growth and global economic crisis. Russia is now moving to inflation targeting regime, but is facing with serious challenges of external financial shocks, non-monetary factors of inflation, its specifics as oil-exporting country. Introduction The period of 1990 s and 2000 s in world economy can be described in terms of spreading globalization trends. They were especially profound in financial sector, thus allowing to speak about financial globalization as one of the prominent directions of globalization process. It should be noted that financial globalization can not be treated as smooth process. It passed through several waves of rising global capita flows and their deceleration or even contraction. The main shock for globalization, but also caused by it, was certainly the global economic and financial crisis of

2 Although there has been some restoration of global financial linkages after tne crisis, many cross-border indicators are still behind pre-crisis level. Globalization trends had led to serious challenges for national monetary policies. These challenges and reactions on them are quite different for two groups of countries: advanced economies and emerging and developing countries (EDCs). The latter will be the main focus of our paper. We should organize the paper as follows. First section will be devoted to main trends of monetary policy in globalization context with special emphasis on global economic and financial crisis and its consequences for monetary policy implementation. Then we turn to more detailed analysis of two groups of EDCs: Eastern and South-Eastern Asian countries (Section 2) and Central and Eastern European countries (Section 3). Special attention will be drawn to Russian monetary policy developments (Section 4). 1. Global trends in monetary policy regimes Financial globalization trends for emerging and developing countries were accompanied by surge in cross-border capital flows (Graph 1). However, it should be pointed out that main source of EDCs capital flows growth in the period before the global crisis had been not private, but official flows (mainly reserves changes). 2

3 Gross cross-border capital flows of EDCs, in per cent of GDP gross capital flows with changes in reserves (per cent of GDP) gross capital flows (per cent of GDP) Graph 1. Gross cross-border capital flows in emerging and developing countries during (in per cent of GDP). Source: calculations based on World Economic Outlook Database. Gross capital flows include (irrespective of the sign) net direct, portfolio and other investments, official flows and (on blue line) changes in reserves. The deepening integration of all groups of countries in global financial system poses serious challenges for domestic monetary policy. Main challenge for monetary policy from globalization, which is wellknown from economic theory, is so-called impossible trinity. It gives to monetary authorities the dilemma of choosing between fixed exchange rate and independent monetary policy. As for advanced economies is concerned, they had found the answer to impossible trinity by introducing inflation targeting framework, allowing to focus on domestic goals (inflation) and to absorb external shocks (by floating exchange rates). Nevertheless there are several other factors affecting national monetary policy besides impossible trinity problem. 3

4 1. The role of global factors in determination of domestic inflation had seriously increased. Among these factors are global output gap (Calderón, Schmidt-Hebbel, 2008), external downward pressure on costs (so called China s factor ) (Rogoff, 2003; Rybinski, 2006), price dynamics on world commodities markets (Cecchetti, Moessner, 2008), external disciplining effect on central banks (WEO, 2006) etc. In some cases globalization effect helped domestic central banks, when Great Moderation had led to decrease of inflation pressure. But in some cases it made domestic inflation more volatile with dangers of sudden hikes (like it had been during the rise in food and energy prices on world markets in late 2007 and early 2008). 2. Rising global capital flows had not only created preconditions for impossible trinity problem, but also, especially in case of EDCs, acted as transmitters of shocks among different countries and regions with possible sudden stops scenario (Calvo, Reinhart, 2000). As global financial flows had been rising drastically, experience of emerging market crises demonstrated increasing costs of exchange rate support. 3. Openness of domestic economies supported spreading currency substitution processes in EDCs, especially in economies of Central and Eastern European countries (CEE) with a very low level of external financial links in pre s period and high level of inflation in transformation period. Currency substitution poses the challenges for monetary policy as it enforces a central bank to put more emphasis on exchange rate dynamics and limits the scope of central bank influence on monetary sphere (e.g., it can not directly influence on foreign currency in circulation). 4. In a broader context globalization makes domestic economies subjected to crises to a greater extent and increases costs of crises. One of the first prominent examples of contagion effect caused by globalization in spreading crises between different countries (Schmukler, Zoido, Halac, 2003) was almost continuing emerging market crisis in (Mexico, 1994; Argentina, 4

5 1995; Asian economies, 1997; Russia, 1998; Brazil, 1999; Turkey, 2000; Argentina, ; Uruguay, 2002). However the most evident example of destructive financial globalization influence was world economic and financial crisis of Global crisis of caused serious challenges for monetary policy s implementation, especially in advanced economies. They responded by decreasing interest rates to zero level and introducing unconventional monetary policies. Though official changes in monetary policy regimes since global crisis were rare, we could see changing attitude to monetary policy implementation diverging to a large extent from previous mainstream statements. First, strong trend had been traced towards increasing role of financial stability goal. It was explicitly supported by so-called macroprudential measures (Macroprudential Policy, 2011). However the discussion still exists on what kind of policy and what institution should be responsible for financial stability. Some advocate Ben Bernanke s view on right tool to work (Bernanke, 2002), which implies that monetary policy with its instruments should be responsible for price stability, while financial regulator (in many countries different from central bank) should focus on financial stability (including implementation of macroprudential tools). Another position focuses on interdependence of monetary and financial sector and need to coordinate activities of central bank and financial regulator, which can be difficult in case of different institutions (as it had been, for example, in the United Kingdom before the global crisis). Second, critics of inflation targeting regime have strengthened. Two main strands of these critics were outlined by J. Frankel (2012): possible overreaction on external price shocks (similar to that of ) and underestimation of dynamics of financial assets prices. It should be noted that within inflation targeting framework the degree of discretion in advanced economies monetary policy significantly increased during the crisis and post-crisis periods. Many emerging market economies, even those that had relied on inflation targeting regimes, strengthened their exchange rate regulation (Mihaljek, 2011). 5

6 Third, global crisis consequences in financial sector caused disruptions in monetary policy transmission mechanism, which led to necessity of new instruments and more discretionary monetary policy. In largest advanced economies unconventional monetary policy measures are still in force now, reflecting problems with monetary transmission. Fourth, for all countries and especially EDCs the destructive role of speculative capital flows had revealed. Thus capital liberalization can not be treated as a blessing per se. The question arises, how to manage these capital flows. One of the possible solutions had been proposed by Nobel Prize winner James Tobin and is connected with imposition of special tax on international capital transactions, that would discourage speculative flows. Some countries had already imposed taxes on financial transactions, including cross-border flows. Despite these substantial changes in approaches to monetary policy implementation, official frameworks of monetary policy have not changed drastically during crisis and post-crisis period. The whole landscape looks like the domination of exchange rate targeting in terms of number of countries (92 countries as of April 2013), although among advanced economies and some emerging market economies inflation targeting regime is still popular (34 countries), while 26 countries still use monetary targeting framework (IMF, 2013). In order to reveal the specifics of changes in monetary policy regimes and their implementation we shall focus on two important regions of EDCs: Eastern and South-Eastern Asia and Central and Eastern Europe. 2. Eastern and South-Eastern Asia case. During the analyzed period Asian countries changed their preferences relative to the regime of monetary policy. The Asian financial crisis of seemed to be a crucial point in this development. After the crisis most of the countries had chosen price stability in line with stable economic growth as primary goals of monetary policy. Some of them also add to this list financial stability. One of the main reasons of this switching was the necessity to control price 6

7 developments, which were characterized by peak in inflation rates in 1998 in all countries except for Singapore (see Graph 2). During this period South Korea turned down monetary targeting framework and moved to economics mainstream inflation targeting. Thailand used exchange rate targeting framework till But in July 1997 it introduced free-floating exchange rate regime within the program of the International Monetary Fund (IMF). First of all Thailand had to accept this program in order to get financial help from the IMF, and one of the conditions supposed monetary targeting framework. It was believed that this framework is more appropriate to achieve new goals of monetary policy in Thailand. But by 2000, when the program had verged to its end, there was a gap between money supply and GDP growth. The monetary policy instruments became more unclear and could not meet economic actors expectations. It was at this moment when Thailand moved to inflation targeting framework. Another country, that changed monetary targeting to inflation targeting, was Philippines. Philippines had also chosen monetary targeting framework under the guidance of the IMF program. The main target for that period was to prevent overexpenditure (i.e. normalizing of the current account) and to reduce inflation rate. As soon as inflation reached single-digit numbers, monetary authorities decided to use inflation targeting regime as it meets their goal of low inflation. During most of the period before the Asian crisis Indonesia kept inflation rate rather low. But the crisis hit the economy severely. As a result Indonesia inflation rate reached 58 per cent in It was the highest value of inflation rates among East and South-East Asian countries. As a result Indonesia had also chosen transition to inflation targeting regime. All these examples show us that monetary targeting framework was losing its effectiveness for the time being. This is in line with explanations from point of view of spreading globalization trends and disruptions in the monetary inflation nexus (at least at domestic level) (Moiseev, 2004). Monetary targeting was replaced by inflation targeting, that is the regime, which allows affecting inflation directly and not relying on monetary aggregates regulation. 7

8 Graph 2. Average annual inflation rates of some East and South-East Asian countries, per cent. Source: World Bank dataset. Singapore and Malaysia stand away from this trend. Singapore is a country with a very high degree of economic openness. That is why Monetary Authority of Singapore (MAS) bet on exchange rate targeting from There are three main parts of its monetary policy regime. First, Singapore dollar is pegged to currencybasket. This basket is based on main trade partners of the country and its economic dependence on different currencies. Each currency has its own weight in each period of time, but these weights are not transparent for the common public. Second, exchange rate regime acts as crawl-like arrangement. And, as MAS highlights, it is mostly forward-crawling arrangement. This adds more flexibility in managing the exchange rate. And, third, exchange rate arrangement is usually reconsidered several times more precisely twice a year. This three-part system is usually called Basket-Band-Crawl system of Singapore. This system is rather flexible unlike other exchange rate targeting regimes, as it allows changing each part in order to respond to external shocks. During the whole analyzed period Singapore showed low inflation rate with a high economic growth rate. 8

9 Malaysia had used monetary targeting framework till On the wave of the Asian crisis interest rate targeting framework was chosen. It happened due to the gap between targeted indicators and actual values and due to lower effectiveness of existing instruments. China for a long period of time relied on double-targeting monetary policy: explicit monetary targeting framework together with implicit exchange rate targeting. Use of capital controls created some room for maneuver within this system. Asian countries often use some mixed forms of monetary policy regimes with differing explicit and implicit targets (implicit targets usually are exchange rate targets) (see Table 1). This allows us to treat them as models with high level of discretion in their monetary policy. Table 1. GDP per capita relationship with monetary policy framework in East and South-East Asian countries Country GDP per capita based on PPP, 2013 GDP per capita based on current exchange rate, 2013 Monetary policy frameworks Singapore 64583, ,53 Exchange rate anchor South Korea 33189, ,98 Inflation-targeting framework + managed floating Malaysia 17747, ,97 Managed floating without targeting Thailand 9874, ,39 Inflation-targeting framework China 9844, ,23 Monetary aggregate target + Exchange rate anchor Indonesia 5214, ,82 Inflation-targeting framework + Exchange rate anchor Philippines 4681, ,37 Inflation-targeting framework Vietnam 4011, ,7 Exchange rate anchor De facto fixed exchange rate (US Lao P.D.R. 3068, ,95 dollar) Cambodia 2576, ,41 Exchange rate anchor Managed floating without Myanmar 1739,84 868,72 targeting Sources: IMF Annual report 2013; World Economic Outlook database, April If we try to compare monetary policy framework choice with level of economic development (GDP per capita is used as indicator), we cannot highlight 9

10 any clear link. Nevertheless, inflation targeting mostly used in countries with high (South Korea) or moderate (Thailand, Indonesia, Philippines) level of economic development. Among them no country uses free floating exchange rate arrangement, while countries with moderate level of GDP per capita prefer modified inflation-targeting framework (sometimes coincided with exchange rate targeting, like in Indonesia). Less developed countries (Vietnam, Lao P.D.R., Cambodia) apply exchange rate anchor, but there is the important exception Singapore (country with the largest level of economic development in this region). Let s now try to estimate preliminary the comparative efficiency of different monetary policy frameworks based on several macroeconomic indicators (real GDP growth rate, inflation rate, current account balance as per cent of GDP, gross cross-border capital flows 1 as per cent of GDP). We focus on two periods of time period of stable economic growth in the region ( ) and global economic and financial crisis ( ) in order to evaluate how different regimes perform during the calm and turbulent times. Countries are divided into groups by monetary policy frameworks. Table 2. East and South-East countries' main macroeconomic indicators with different monetary policy frameworks in Monetary policy Framework Average real GDP growth rate, per cent Average Average current inflation rate, account balance, per cent per cent of GDP Cross-border capital flows, per cent of GDP Exchange rate targeting framework Monetary targeting Inflation targeting Other frameworks Gross capital flows include (irrespective of the sign) both assets and liabilities of direct, portfolio and other investments. 10

11 Source: simple average indicators were calculated from World Economic Outlook database and International Financial Statistics data. We can conclude from Table 2 that the highest rates of real GDP growth demonstrated countries with monetary targeting framework. It may seem contradictory to our conclusion of inefficiency of this regime, but we should point out that during 5 years China was a member of this group. Countries with other frameworks also showed good results. It seemed that the most efficient were countries with implicit exchange rate targeting and monetary policy with higher degree of discretion, while economies of inflation targeting countries grew with the lowest rate. It also should be noted that best results in terms of inflation dynamics were also shown not by inflation targeting countries. This puzzling trend can be explained by important role of exchange rate targeting in containing inflation expectations. It is not surprising that exchange rate targeting countries had the highest positive values of current account balance, as exchange rate policy in many countries of the region was aimed at supporting export and containing import growth. What is the most prominent is the outstanding level of openness to international capital movement by exchange rate targeting countries, although we should note that two of them are small open economies (Singapore and Brunei Darussalam). Then let s turn to test of monetary policy frameworks by global economic and financial crisis (see Table 3). But before we should point out that by the time of the crisis no country clearly supporting monetary targeting framework left in the region. 11

12 Table 3. East and South-East countries' main macroeconomic indicators with different monetary policy frameworks in Monetary policy framework Average real GDP growth rate, per cent Average inflation rate, cent Average current account balance, per per cent of GDP Cross-border capital flows, per cent of GDP Exchange rate targeting framework Inflation targeting Other frameworks Source: simple average indicators were calculated from World Economic Outlook database and International Financial Statistics data. East and South-East Asian countries were among countries less affected by global crisis. However still within the region countries showed different results. Countries with other frameworks and inflation targeting countries were among most negatively influenced by the external shock in terms of economic development. Though exchange rate targeting countries faced with highest inflation rates, they were accompanied by highest economic growth rates. They still were the best performers in terms of current account balance and cross-border capital flows, but the difference with other groups has been diminished. This was caused by adverse shock on trade from decreased external demand and adverse shock on international capital flows by global financial disruptions. Thus we can conclude from analysis of both stable and crisis periods that exchange rate targeting countries showed the best results in terms of main macroeconomic indicators. 3. Central and Eastern European case. Evolution of monetary policy regimes in CEE countries in 1990 s to a large extent looked like a field for experiments, as countries had not enough experience in operating market economy. These experiments were to a large extent influenced by IMF-supported programs. On initial stage of transformation CEE countries 12

13 divided into two groups: those, who relied stabilization programs on monetary targeting (Albania, Bulgaria, Romania and Slovenia), and broader and more successful group, relied on different kinds of fixed exchange rates (among others former Czechoslovakia, Croatia, Estonia, Hungary, Lithuania, Poland). Countries changed their regimes during 1990 s and 2000 s and by the time of global economic and financial crisis there had been formed several steady groups: 1. Inflation targeters. This regime was rather new for CEE countries (as for other EDCs) and transition to it began in late 1990 s from Czech Republic. By 2007 this group had already included Czech Republic, Poland, Hungary (first wave) and Albania, Romania and Serbia (second wave). 2. Countries with currency board arrangements. Some of them (Estonia, Lithuania) introduced this regime at an early stage of transition, while others (Bosnia and Herzegovina, Bulgaria) later in 1990 s after serious economic and/or political collapses. This group had not expanded since Countries with different forms of explicit and implicit exchange rate targeting (intermediate group between two previous extremes). This group by 2007 had included only few countries (Latvia, Croatia, FYR Macedonia). All of them used de facto rather strict pegs, that made them close to second group. 4. Slovenia in 2007 introduced euro. However by that time two territories (Kosovo and Montenegro, that had become fully independent just a year before) introduced euro in their domestic circulation unilaterally. By the year 2000 almost all CEE countries had overcome transformation recession, and period of was characterized by more or less stable economic growth for the whole region). Thus we can make a first approximation of comparative efficiency of different monetary policy regimes in the region during this period (see Table 4). 13

14 Table 4. Economic performance of CEE countries with different monetary policy frameworks during Groups of countries Average GDP Average Average current Gross cross-border with different regimes growth rate inflation rate account balance capital flows (per (per cent) (per cent) (per cent of GDP) cent of GDP) Inflation targeting Different forms of exchange rate peg Currency board Monetary targeting Source: simple average indicators were calculated from World Economic Outlook database and International Financial Statistics data. Several preliminary conclusions can be drawn from the data analysis: 1. From the economic growth point of view all groups of countries performed rather well, but countries with currency board and monetary targeting regimes seemed outstanding. Inflation targeters demonstrated the worst results. 2. It seemed that inflation targeting should perform the best from the point of view of inflation rates. However, actually again countries with currency board system showed the lowest inflation rates, that can be explained, first, by high degree of confidence to their policy and, second, by anchoring of expectations through exchange rate stabilization. The worst results of monetary targeting countries confirm the above-mentioned split between monetary and inflation dynamics in globalization context. 3. The costs for countries with currency board systems were significantly larger amounts of current account deficits, which has threatened them in case of sudden stops. It is interesting to note that difference in levels of this indicator was not so significant between inflation and exchange rate targeting countries. 4. Finally, countries with hard or soft exchange rate pegs were more intensively involved in cross-border capital flows, primarily by attracting foreign capital. Thus we can conclude that exchange rate guarantees, given by monetary 14

15 authorities, were meaningful for foreign investors. Countries with monetary targeting were much less involved in international capital movement. The whole conclusion can be drawn that during period with stable economic performance (both for the region and global economy as a whole) currency board regime demonstrated the best results both from output and price dynamics, but with serious potential threats, while inflation targeting and exchange rate targeting countries were characterized by similar results with more balanced set of indicators levels (except for higher involvement in international capital mobility for exchange rate targeting countries). The situation had changed significantly during global economic and financial crisis that was spread on CEE region in We should note that several changes in monetary regimes appeared during the crisis, as Slovak Republic introduced euro in Thus we can distinguish Slovenia and Slovak Republic as euro area members. Also the group of monetary targeting countries disappears, as all of them had introduced inflation targeting regime. Table 5 Economic performance of CEE countries with different monetary policy frameworks during global economic crisis ( ) Groups of countries Average GDP growth Average inflation Average current with different regimes rate (per cent) rate (per cent) account balance (per cent of GDP) Inflation targeting Different forms of exchange rate peg Currency board Euro area members Source: simple average indicators were calculated from World Economic Outlook database. Countries with different forms of exchange rate pegs were hit by global economic crisis most severely. Thus we can draw a link between previous 15

16 attraction of foreign capital and magnitude of external shock. Inflation targeting countries performed in the best way from economic growth viewpoint, but faced with higher inflation rates (mainly because of large external price shock in 2008). Euro member countries demonstrated more or less balanced results with lowest levels of inflation and current account deficits. So we can make a conclusion that inflation targeting regime in fact acted as absorber of external shocks. After the global crisis CEE countries faced with another external shock European debt crisis, which have been the serious challenge for the European integration process. But, despite that, two countries (Estonia in 2011 and Latvia in 2013) joined the euro area during this period. It can be explained by the specifics of pegged to euro exchange rate regimes. Euro introduction would bring for these countries additional benefits in terms of rising confidence, while staying outside euro area they share the same risks together with specific country risks. For inflation targeting countries euro introduction presents higher level of uncertainty on economic prospects. 4. Russia: special case among CEE s Russia seems to be rather similar to CEE countries from the viewpoint of its basic characteristics: geographic location and passing through transition period. However it is a special case in terms of economy s size, its structure (heavy reliance on energy exports) and integration priorities (Russia is not going to participate significantly in European integration project). Similar to other CEE countries Russia started transition process with experiments in monetary policy frameworks. It officially introduced monetary targeting on early stage of transition, but actually monetary policy was rather controversial and faced with different specific challenges (like dissolution of monetary union among former Soviet republics based on Soviet ruble, widespread non-payments and barter, high level of dollarization of domestic economy especially in currency form). Monetary targeting had proved to be ineffective in lowering inflation rate. Average inflation rate during was equal to

17 per cent, while national economy was in deep transformation recession. During one day (so called Black Tuesday ) on October, 11-th 1994 Russian ruble depreciated to USD by 21.5 per cent. That was the clear signal of the role of exchange rate in economic actors expectation. Thus in 1995 the new regime exchange rate targeting in the form of horizontal band was introduced. Period of explicit exchange rate targeting ( ) showed better results for Russian economy: annual average inflation rate fall from 198 per cent in 1995 to 15 per cent in 1997, economic recession had slowed down. However, this regime became attractive for foreign capital (see Graph 3). Cross-border gross capital flows in Russia (per cent of GDP) 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0, gross capital flows with net errors and omissions gross capital flows with net errors and omissions and reserve assets' changes gross capital flows Graph 3. Gross cross-border capital flows in Russia during (in per cent of GDP) Source: calculations based on balance of payments data of Central Bank of Russia. Gross capital flows include (irrespective of the sign) both assets and liabilities of direct, portfolio and other investments. 17

18 Rising inflow of foreign capital mainly through portfolio investments in government securities and shares made Russian financial system and economy more vulnerable to external shocks. In late 1997 it faced with contagion effects from Asian crisis, and exchange rate support cost for two thirds of foreign exchange reserves in that time. Further support demanded for interest rate hike, which led to fiscal and finally exchange rate crisis. Period of 1998 crisis and its aftermath can be characterized in terms of anticrisis monetary policy with contradictory goals (support for banking system and containing inflation). In order to contain exchange rate depreciation and to widen the possibilities for domestic monetary policy a number of foreign exchange restrictions were introduced (including different segments on organized foreign exchange market or 100 per cent domestic sale of export revenues). Crisis impact and anti-crisis policy measures had led to contraction of Russia s involvement in international capital flows (see Graph 3). During 2000 s favorable external environment (rising prices for oil on world commodities markets and improvement of conditions on global financial markets from 2003) had created new opportunities for Russian economy and monetary policy. After the crisis monetary authorities returned to exchange rate targeting, but this targeting had become implicit, while explicitly first monetary aggregates were targeted, and then authorities proclaimed their intention to introduce inflation targeting framework. In fact nominal exchange rate to US dollar and after 2005 to currency basket (consisting of US dollar and euro) were targeted. It can be seen from the dynamics of nominal exchange rate of the ruble (see Graph 4). 18

19 Nominal and real effective exchange rates of the RUR (2010 = 100) NEER REER Graph 4. Nominal and real effective exchange rate of Russian ruble dynamics in (2010 = 100). Source: Bank for International Settlements. While nominal effective exchange rate from the year 2003 till first half of 2008 had been more or less stable, there had been clear trend towards appreciation of real exchange rate. In order to contain growth of real exchange rate some kind of policy mix between monetary and fiscal policy had been introduced. While monetary policy was responsible for nominal exchange rate targeting and relied mainly on foreign exchange interventions, fiscal policy helped to restrain inflation pressure by supporting positive fiscal balance and establishment of sovereign wealth fund, which was divided in early 2008 into two parts. This policy had proved its efficiency before the global economic crisis. In average real GDP growth rate was equal to 7.1 per cent. While average inflation rate was relatively high 14.2 per cent it demonstrated clear downward 19

20 trend during this period. The main weakness of this model was its dependence on external factors from point of view of oil exports and capital inflows. Global economic and financial crisis consequences had become the strong external shock for Russian economy, which was met by monetary policy measures in two directions: support of exchange rate and of banking sector liquidity. The result from economic growth viewpoint was 3 per cent real GDP contraction during However Russian banking system had been stabilized, while large amount of capital left the country (net private sector capital outflow amounted 165 bln USD from September 2008 till March 2009). Exchange rate support was lessened in beginning of 2009 that caused ruble depreciation. After the crisis Russian monetary authorities began the process of switching from exchange rate targeting to inflation targeting regime. The amount of foreign exchange interventions has started to decrease from second half of 2010 (see Graph 5), exchange rate regime have become more explicit and flexible. Net foreign exchange interventions of CBR in USD during (bln USD) Graph 5. Net foreign exchange interventions of CBR in USD during (bln USD). 20

21 However, new external shocks on world financial markets have led to the necessity of central bank interventions. Before 2013 these shocks were short-term (August-October 2011, May-June 2012), but from the second half of 2013 the pressure towards ruble depreciation have become more persistent with sharp acceleration in the beginning of It seems to us that Russia is not ready yet for transition to inflation targeting framework and it is caused by several reasons. 1. Central banks goals for inflation are very ambitious (reducing inflation rate to 4 per cent by 2016), so they will require more restrictive monetary policy stance, which will lead to costs in terms of economic growth. 2. Russia as oil exporting country is subjective to Holland disease, so it is important from this viewpoint to regulate exchange rate, especially in the periods of upward pressure. 3. There is a danger of central banks overreaction on external price shocks (see Frankel s argument above). This overreaction had already been the case during the period of rising food prices in late 2007 beginning of Russian inflation dynamics also depends on non-monetary factors (changes in regulated prices, local monopoly power etc.). Without overcoming these frictions efficiency of inflation targeting should be rather low. Russia is going to follow advanced economies and some emerging markets (including Czech Republic and Poland) in their way to inflation targeting regime implementation, but, from our point of view, more attention of monetary authorities should be focused on other emerging markets experience including Eastern and South-Eastern Asian countries. Conclusion Monetary policy in global economy now stands on crossroads. Advanced economies, while formally implementing inflation targeting regime, have significantly increased the level of discretion in their policy implementation and the most significant among them are still pursuing unconventional monetary 21

22 policy. There is a strong consensus towards increasing role of financial stability goal in central bank s activities. Eastern and South-Eastern Asian economies demonstrated both high rates of economic growth before the global crisis and rather strong resilience to crisis. Many of them explicitly or implicitly rely on exchange rate targeting regimes, which have proved their efficiency, and in most cases these are intermediate exchange rate regimes. Central and Eastern Europe countries, on the contrary, have demonstrated the trend consistent with bipolar view with detachment of two groups of countries: with inflation targeting regimes and with currency boards or strict exchange rate targeting. The former group has showed more balanced macroeconomic results, while the latter had performed better during stable economic growth, bur suffered more during global crisis. Russia before the global crisis had been the example of rather efficient intermediate exchange rate regime, but highly affected by external shocks. Now it is turning to inflation targeting framework. This transition in current economic situation can cause from our point of view serious economic costs. References Bernanke B. (2002) Asset-Price "Bubbles" and Monetary Policy. Remarks before the New York Chapter of the National Association for Business Economics, New York, October 15 ( Calderón C., Schmidt-Hebbel K. (2008) What Drives Inflation in the World? Central Bank of Chile Working Papers. No October. Calvo G.A., Reinhart C.A. (2000) When Capital Flows Came to a Sudden Stop: Consequences and Policy. In Reforming the International Monetary and Financial System. Edited by P.B. Kenen, A.K. Swoboda. Washington DC, International Monetary Fund. 22

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