W-3 Monetary Policy in IT Regimes: Chile in the Aftermath of the Financial Crisis

Transcription

1 W-3 Monetary Policy in IT Regimes: Chile in the Aftermath of the Financial Crisis IMF Singapore Regional Training Institute OT Monetary Policy April 23 27, 2018 Presenter This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF courses. Any reuse requires the permission of the IMF. Outline I. Chilean economy and institutions when IT was adopted II. Chile s experience with IT III. Model-based forecasts vs. outturns 2

2 Chilean Institutions Favorable for IT IT partially implemented starting in 1990 and fully since 1999 Constitutional organic law provides Independence (both objectives and instruments) Clear mandate: price stability and the normal functioning of the payments system 3 Fiscal Situation Consistent Reduction of Government Debt 4

3 The Convergence Phase Substantial Disinflation CPI Headline Inflation and Inflation Targets, (% per year) 5 The Convergence Phase Monetary Policy Implementation Improved Progressively The system had certain key IFT characteristics: An announced annual quantitative inflation target (a nominal anchor) Explicit announcement of a disinflation objective: Slow convergence to lower inflation Widespread backward-looking indexation and concerns of key (relative) price misalignment with faster disinflation 6

4 The Convergence Phase Monetary Policy Implementation Improved Progressively Some other typical features of IFT were absent, e.g., transparency and communication devices were not well developed; Inflation targets conflicted with other nominal commitments, particularly the exchange rate. Interventions by CBC (target band for the exchange rate) + capital account regulations (remember the Trinity?) Difficult management of interest rates, but started hitting target for overnight interest rate Increasing progress throughout the 1990s: 1990: rough management of interest rates (various instruments) Eventually, management of liquidity to hit target for overnight interest rate 7 The Convergence Phase Monetary Policy Implementation Improved Progressively Chile: Short-term Interest Rates, Chile: Monetary Policy Rate (EOP, %) Chile: Interbank Loan/Discount Rate: Days: Indexed/CPI (%) Chile: Overnight Interbank Interest Rate: Financial System Avg (%) Jan-2000 Oct-2000 Jul-2001 Apr-2002 Jan-2003 Oct-2003 Jul-2004 Apr-2005 Jan-2006 Oct-2006 Jul-2007 Apr-2008 Jan-2009 Oct-2009 Jul-2010 Apr-2011 Jan-2012 Oct-2012 Jul-2013 Apr-2014 Jan-2015 Oct-2015 Jul

5 Steady State Phase: Full-fledged IT : Conclusion of Disinflation CPI headline inflation and inflation target (%) A clear mandate and unambiguous inflation target provided effective nominal anchor 9 Steady State Phase: Full-fledged IT : Consolidation Gradual transition to a floating exchange rate system Widening of exchange rate band (Dec 1998), very few interventions by the CBC. Regulatory adjustments to foster foreign exchange hedging Staring in Sep 1999, the target band for inflation was (periodically) adjusted, and in 2007, the target became a 3%, with a tolerance interval of +/- 1%. 10

6 Steady State Phase: Full-fledged IT : Consolidation IT characteristics Floating exchange rate regime Regular publication of inflation reports (three times a year) Monthly monetary policy meeting dates announced way in advance Disclosing of meeting minutes, first with a three-month delay, and later shortened to three weeks Markedly improvement in disclosure of information, including detailed forecasts and views about transmission mechanisms 11 Steady State Phase: Full-fledged IT : Consolidation Two key companion ingredients Fiscal policy: An absence of fiscal dominance Structural fiscal balance rule improved the countercyclicality and credibility of fiscal policy Banco Central de Chile (BCC) s anti-inflationary credentials earned in 1998 made clear the commitment to price stability 12

7 Anchoring of Inflation Expectations 13 Steady State Phase: Full-fledged IT Gained Credibility Controlling Inflation 2001: 40% expected inflation at 3.5% 2007: 90% expected inflation at 3% 14

8 Steady State Phase: Full-fledged IT Reduction in Inflation Volatility Chile: Inflation volatility, (%) Average inflation volatility declined to about 1/4 of its pre-it level 15 Steady State Phase: Full-fledged IT Reduction in Growth Volatility Average output volatility clearly declined to about 2/3 of what it was in the late 1980s 16

9 Striking Decline in Inflation Persistence: Stable inflation 17 Framework Survived the Global Financial Crisis Chile: Inflation (non-seasonally adjusted; y/y percentage change) Headline inflation Core inflation Jan-2001 Jan-2002 Jan-2003 Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan

10 Chile: Workshop Prior to the global crisis, economy was overheating, high inflation, but once crisis came, large drop in output followed by fast recovery Inflation returns to the target Negative output gap is almost closed Chile: Workshop Accommodative stance by the central bank during most of the crisis. During 2008 exchange rate became overvalued; filtered trend shows a steady appreciation path but this does not necessarily lead to a loss of competitiveness Negative real interest rate gap Real exchange rate close to its equilibrium

11 To raise the policy rate or not? Initial Conditions Q Q Q Q Inflation YoY - target -4.7 pp -3.3 pp -1.9 pp -0.5 pp RIR gap -0.9 pp -2.1 pp -3.5 pp -3.2 pp RER gap -5.3% -4.1% -0.9% -4.0% Output gap -2.6% -4.7% -1.6% -0.1% 21 Chile Model: No Judgement 22

12 Chile Model vs. Data: No Judgement Discrepancy in output gap prediction leads to lower forecast for core inflation 23 Domestic demand expanding Chile s economy expanded at a robust pace during on the back of exceptionally dynamic domestic demand output gap closing, inflation pressures moderated; inflation expectations remained anchored

13 Domestic demand expanding and inflation rising toward the target Thank you! This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF courses. Any reuse requires the permission of the IMF.

14 The Convergence Phase Monetary Policy Implementation Improved Progressively Chile: Short-term Interest Rates, Chile: Monetary Policy Rate (EOP, %) Chile: Interbank Loan/Discount Rate: Days: Indexed/CPI (%) Chile: Overnight Interbank Interest Rate: Financial System Avg (%) Jan-2000 Oct-2000 Jul-2001 Apr-2002 Jan-2003 Oct-2003 Jul-2004 Apr-2005 Jan-2006 Oct-2006 Jul-2007 Apr-2008 Jan-2009 Oct-2009 Jul-2010 Apr-2011 Jan-2012 Oct-2012 Jul-2013 Apr-2014 Jan-2015 Oct-2015 Jul