Inflation Targeting in MENA Countries

Transcription

1 Inflation Targeting in MENA Countries

2 Other titles by David Cobham: The Making of Monetary Policy in the UK, (Chichester: John Wiley, 2002) Co-edited with Nu'man Kanafani: The Economics of Palestine: Economic Policy and Institutional Reform for a Viable Palestinian State (London: Routledge, 2004) Edited: The Travails of the Eurozone: Economic Policies, Economic Developments (London: Palgrave, 2007) Edited with Ghassan Dibeh: Monetary Policy and Central Banking in the Middle East and North Africa (London: Routledge, 2009) Co-edited with Øyvind Eitrheim, Stefan Gerlach and Jan F. Qvigstad: Twenty Years of Inflation Targeting: Lessons Learned and Future Prospects (Cambridge: Cambridge University Press, 2010) Co-edited with Ghassan Dibeh: Money in the Middle East and North Africa: Monetary Policy Frameworks and Strategies (London: Routledge, 2011)

3 Inflation Targeting in MENA Countries An Unfinished journey Edited By Mongi Boughzala Professor of Economics, University of Tunis El-Manar and David Cobham Professor of Economics, Heriot-Watt University, UK Palgrave ECONOMIC RESEARCH ~ macmillan RESEARCH~4.!.19 F O R U M RUM~ <:.5'-> i i a '=I! 11 ii.,.r!::>i.=..l.slij

4 * Selection and editorial matter Mongi Boughzala and David Cobham 2011 Individual chapters Contributors 2011 Softcover reprint of the hardcover 1st edition All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6-10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number , of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin's Press LLC, 175 Fifth Avenue, New York, NY Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave and Macmillan are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN ISBN (ebook) DOI / This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Inflation targeting in MENA countries: an unfinished journey I [edited by] David Cobham, Mongi Boughzala. p. em. Includes index. Summary: "This volume assesses the current state of play for Middle East and North African countries, in the light of wider work on inflation targeting, and provides lessons from the evolution of monetary policy in Europe. "-Provided by publisher. 1. Monetary policy-middle East. 2. Inflation (Finance)-Middle East. I. Cobham, David P. II. Boughzala, Mongi, HG '30956-dc

5 Contents List of Tables List of Figures Preface Acknowledgements Notes on Contributors 1 Introduction Mongi Boughzala and David Cobham Part I Issues and Challenges 2 Moving towards Domestic Monetary Policy Anchors - Are Financial Markets Ready in the Mediterranean Region? Thierry Bracke 3 Fiscal Policy and Macroeconomic Stability in Mediterranean Countries Michael Sturm and Franr;ois Gurtner 4 Capital Mobility and the Optimal Monetary Policy Rule: A Tunisian Case Study Mahmoud Sami Nabi and Ndiame Diop 5 Monetary Policy Transmission and Targeting Mechanisms in Six MENA Countries Simon Neaime 6 Monetary Transmission Mechanisms: The Credit versus the Interest Rate Channel Adel Boughrara and Samir Ghazouani vii ix xii xiii xiv Part II The Journey towards IT 7 From Bretton Woods to Inflation Targeting: Financial Change and Monetary Policy Evolution in Europe David Cobham 171 v

6 vi Contents 8 Monetary Policy in Turkey: The Reasons for Introducing IT and the Outcome 193 Hasan Ersel and Fatih Ozatay 9 The Evolution of Monetary Policy in Egypt and Steps towards Inflation Targeting 230 Rania Al-Mashat 10 The Uncertain Journey towards Inflation Targeting in Tunisia 256 Mongi Boughzala and Hassouna Moussa 11 The Journey towards Inflation Targeting in Morocco 287 Lahcen Achy and Adel Boughrara Index 319

7 Tables 3.1 General government balance General government gross debt General government expenditure General government revenue Fiscal expansion in oil-exporting countries, Hydrocarbon dependency of Mediterranean countries, A simple matrix of the effects of higher capital mobility Effect of capital mobility on the disinflation speed, the policy rule coefficients and the variances of output and inflation Unit root statistics- Egypt Cointegration tests- Egypt Unit root statistics-jordan Cointegration tests- Jordan Unit root statistics- Lebanon Cointegration tests- Lebanon Unit root statistics- Morocco Cointegration tests- Morocco Unit root statistics- Tunisia Cointegration tests- Tunisia Unit root statistics- Turkey Cointegration tests- Turkey GMM-in system estimates for Egypt; one-step results GMM-in system estimates for Jordan; one-step results GMM-in system estimates for Morocco; one-step results GMM-in system estimates for Tunisia; one-step results Main economic indicators Fiscal indicators, Confidence measures Financial depth, credit growth and profitability of the banking sector Net claims of non-residents on the non-banking private sector Expected and realised inflation rates Overnight borrowing rates of the Central Bank of Turkey Macroeconomic indicators 243 vii

8 viii List of Tables 9.2 Accountability in selected inflation targeting countries Egypt: Monetary policy instruments Financial sector indicators Fiscal indicators Status of forecasting and modelling Banking system profitability and solvency indicators Selected macroeconomic indicators (before reform) Selected macroeconomic indicators (after reform) Non-performing loans of Moroccan banks Selected macroeconomic indicators Fiscal policy indicators, Non-performing loans of Morocco's banks, The pass-through of the interbank rate to deposit rates and the treasury bill rate Turning points, durations and amplitudes Steepness and depth 308

9 Figures 1.1 Evolution of monetary policy regimes, industrial countries Evolution of monetary policy regimes, non-industrial countries Total bank assets versus broad money Credit to the private and the public sector Main autonomous factors of liquidity demand Depth of the banking sector versus depth of stock markets Foreign exchange market turnover in Morocco Bank capitalisation in Mediterranean countries Bank profitability Non-performing loans General government balance General government gross debt General government expenditure General government revenue Inflation Fiscal capacity in Mediterranean countries, Nominal effective exchange rates Real interest rates Response to a supply shock under 'pure' IT (r = 0.47; q = 0.76) Response to a supply shock under a 'pure' IT regime (r = 3.8; q = 0.76) Response to a supply shock under the 'adjusted' IT regime (r = 0.47, q = 0.76) Response to a supply shock under the 'adjusted' IT regime (r = 3.8; q = 0.76) Response to a supply shock under a 'pure' IT regime (r = 3.8; q = 0.1) Response to a supply shock under the 'adjusted' IT regime (r = 3.8; q = 0.1) Response to a confidence shock under the 'pure' IT regime (r = 0.47; q = 0.76) Response to a confidence shock under the 'pure' IT regime (r = 3.8; q = 0.76) Response to a confidence shock under the 'pure' IT regime (r = 0.47; q = 0.76) and exchange rate band 90 ix

10 x List of Figures 4.10 Response to a confidence shock under the 'pure' IT regime (r = 3.8; q = 0.76) and exchange rate band Response to a confidence shock under the 'adjusted' IT regime (r = 0.47; q = 0.76) Response to a confidence shock under the 'adjusted' IT regime (r = 3.8; q = 0.76) Impulse response functions- Egypt Impulse response functions- Jordan Impulse response functions- Lebanon Impulse response functions- Morocco Impulse response functions- Tunisia Impulse response functions- Turkey The consumer inflation rate The GDP growth rate The corridor system of the CBT Central Bank of Turkey policy rate and the secondary market benchmark bond rate Inflation Net claims on government in % of reserve money Net claims on government and claims on the private sector in % of M Contributions of net foreign assets and net domestic assets to M2 (%) Contributions of net foreign assets and net domestic assets to M2, Broad money and inflation, Money and output Money and inflation a BCT nominal discount rates b BCT real discount rates Comparison of the BCT target and actual value of the growth rate of M Key interest rates in Tunisia Inflation rate, average consumer prices, Central government fiscal balance Non-performing loans in Tunisia Inflation rate, consumer price index, Real effective exchange rate Average monthly money market rate Central bank intervention rates and average interbank rate 291

11 List of Figures xi 11.2 Central bank intervention rates and money market rates, Overview of the monetary policy transmission mechanism Pass-through of the BAM key refinancing rate to inflation and to 52-week treasury bills Response of DY to one standard deviation of demand shock Response of DP to one standard deviation of supply shock Response of DY to one standard deviation of supply shock Response of DP to one standard deviation of demand shock The distribution of supply shocks The distribution of demand shocks 312

12 Preface This volume resulted from a seminar on 'Monetary Policy and Inflation Targeting in the Middle East and North Africa (MENA) Region' held in Tunis in October 2008 and organised by the Economic Research Forum (ERF), the Euro-Mediterranean Forum of Economic Research Institutes (FEMISE) and the University of Tunis El-Manar. This important event took place following the announcements by three countries of the region, Egypt, Morocco and Tunisia, that they intend to adopt the more coherent and more demanding monetary strategy called inflation targeting (IT). The three countries have also indicated that they are preparing for this major transition, that is they are strengthening their financial systems, improving their fiscal performances, moving to more flexible exchange rate regimes and implementing a set of technical and institutional reforms required for the conduct of this more effective monetary policy. Turkey has already gone through a transition period and formally switched to IT in The successful experience of Turkey and many other similar countries has made IT more popular. However, there is still a need for further debate and analysis on this issue before the final move to IT in the three MENA countries. The financial crisis has raised additional concerns about the optimal design of monetary policy and the role of the central bank. The purpose of the Tunis seminar was to contribute to this debate, not just for these countries, and that is also the aim of this volume. In agreement with ERF and FEMISE, and given the scope of this theme, the editors decided to include some additional contributions, in the form of Chapters 3 and 4. The other chapters are updated versions of papers presented in the seminar. Chapter 6 is based on a paper accepted for publication by the Middle East Development Journal, and we thank its Managing Editor for his permission to publish it in this volume and his support for the wide dissemination of ERF- and FEMISE-sponsored research. We would also like to thank Ahmed Galal, President of FEMISE and Managing Director of ERF, and Jean-Louis Reiffers, Chairman of FEMISE's scientific committee, for their support for this project. The MENA region needs more research and debate on key macroeconomic issues and more generally on outstanding social issues. We are pleased to announce that this volume is going to be the first in a series of books that FEMISE has launched. Mongi Boughzala and David Cobham xii January 2010

13 Acknowledgements The editors are grateful to Scott Roger and Cambridge University Press for permission to reproduce Figures 1.1 and 1.2, which originally appeared in Chapter 4 of D. Cobham, 0. Eitrheim, S. Gerlach and ].F. Qvigstad (eds), Twenty Years of Inflation Targeting: Lessons Learned and Future Prospects, Cambridge: Cambridge University Press, 2010; and to Adel Boughrara and the Indian Journal of Economics and Business for permission to publish Figure 10.4, which originally appeared in a 2006 paper in that journal by Adel Boughrara. They are also grateful to World Scientific for permission to republish chapter 6, which originally appeared as A. Boughrara and S. Ghazouani (2010), 'Is There a Bank Lending Channel of Monetary Policy in Selected MENA Countries? A Comparative Analysis', Middle East Development Journal, 2(2), December. xiii

14 Contributors Lahcen Achy is Professor of Economics at the National Institute of Statistics and Applied Economics (INSEA, Rabat, Morocco) and Senior Economist at the Carnegie Middle East Center in Beirut. He obtained his PhD at the Universite Libre de Bruxelles. Dr Achy is a research fellow of the Economic Research Forum (ERF) and the Moroccan Academic Liaison for the Researchers' Alliance for Development (RAD). He has published in several internationally refereed journals and co-authored a number of books on the political economy of reform in the MENA region; globalisation, employment, and income distribution; competition and efficiency; as well the financial sector and its impact on growth. Rania Al-Mashat has been Assistant Sub-Governor and Head of Monetary Policy at the Central Bank of Egypt since October Prior to that, she was an economist in the Asia and Pacific Department at the International Monetary Fund, covering a range of countries which included India and Vietnam. She received her doctoral degree in economics from the University of Maryland at College Park in Adel Boughrara is an Associate Professor at the University of Sousse, and is currently the Director of the Doctoral School in Economics and Management there. He has also been a Visiting Associate Professor at the United Arab Emirates University. His research interests include fiscal and monetary policies, with particular emphasis on central banking issues. Mongi Boughzala is Professor of Economics at the University of Tunis El-Manar and obtained his PhD from the University of Minnesota. His current research and main interests are in monetary economics and labour economics. He is a research fellow in the Economic Research Forum and active within the FEMISE network. Thierry Bracke is Deputy Head of Division of the EU Neighbouring Regions Division of the European Central Bank. He holds an MA in Economics from Ghent University as well as from Aix-Marseille University. He has worked at the European Central Bank since 2000, with a main focus on international policy issues and international macroeconomic issues. He previously worked at the National Bank of Belgium. xiv

15 Notes on Contributors xv David Cobham is Professor of Economics at Heriot-Watt University. His main research area is UK monetary policy, but he also works on the economies of the Middle East. He was a Senior Houblon-Norman Fellow at the Bank of England in He has recently co-edited books on inflation targeting and on monetary policy in the Middle East and North Africa. He is Associate Editor of the Review o{middle East Economics and Finance. Ndiame Diop is a Lead Economist at the World Bank. He joined the World Bank in Since then he has worked in South Asia, the Trade Department, and the Middle East and North Africa Economics Department. His areas of research interest include trade policy, growth and macroeconomics, where he has published extensively. Hasan Ersel received his PhD in Economics from Ankara University in 1971, where he worked as a faculty member until He served as Senior Research Officer at the Capital Market Board of Turkey (1984-7) and as Head of the Research Department of the Central Bank of the Republic ofturkey ( ), before becoming its Vice Governor (1991-3). He worked for the Yap1 Kredi Bank as Senior Executive Vice President ( ) and as a Member of the Board of Directors (2003-4). Currently he is teaching part time at the Sabann University in Istanbul. Samir Ghazouani is Full Professor of Econometrics at the University of 7 November at Carthage, Tunisia. He has been a Research Associate of the Economic Research Forum (ERF) since His research interests include corporate finance, economic and financial reforms in the MENA region (financial liberalisation, privatisation, firms' restructuring and efficiency), financial system development and growth, FDI and growth. Fran~ois Gurtner is an Economist in the EU Neighbouring Regions Division of the European Central Bank. He holds a PhD in economics from Heriot-Watt University (Edinburgh). His main focus at the ECB has been on economic developments and macroeconomic policy issues in Mediterranean countries and in EU candidate/accession countries. Before joining the ECB in 2004 he worked at the European Commission in the Directorate General Europe Aid Cooperation office, mainly working on MENA countries with a focus on Palestine. Hassouna Moussa is Professor of Economics at Acadia University, Nova Scotia, Canada. He teaches macroeconomics and his main research interests are in monetary economics and banking, finance and development. He has published a range of articles on monetary policy, trade and exchange rate policy in Tunisia.

16 xvi Notes on Contributors Mahmoud Sami Nabi is an Assistant Professor of Economics at IHEC Sousse, a Research Fellow of the LEGI laboratory at Tunisia Polytechnic School (TPS) and a Research Associate of the Economic Research Forum. He holds an Engineering Diploma from TPS, and an MSc in mathematics applied to economics and a PhD in economics from the University of Paris I Pantheon-Sorbonne. His main areas of research are financial economics, international economics and economic development. Simon Neaime is Professor and Chair of the Department of Economics, American University of Beirut, Lebanon. He has written numerous papers published in a range of international economics and finance journals, and several graduate textbooks on financial, monetary and international economics. His most recent articles appeared in the Open Economies Review, the Review of Middle East Economics and Finance, the Journal of Economic Integration, the North American Journal of Economics and Finance, and the International Economic Journal. Fatih Ozatay received his PhD in Economics from Ankara University in He served as a Mechanical Engineer at the State Railways Department in 1978, as a specialist at the State Planning Organization ( ), as an Assistant Investment Coordinator at STFA Holding (1985-7), and as an Economist and an Acting Director General in the Research Department of the Central Bank of the Republic of Turkey ( ). He worked as a faculty member at Ankara University and also lectured at Bilkent and the Middle East Technical University ( ). Between 1995 and 1999, he was an advisor at the Turkish Treasury. He served as Vice Governor at the Central Bank of Turkey and also as a member of the Monetary Policy Committee (May 2001-April 2006). He has been a faculty member at the TOBB-University of Economics and Technology and Director of the Economic Policy Research Institute at the Economic Policy Research Foundation of Turkey (TEPAV) since April2006. Michael Sturm is Principal Economist in the EU Neighbouring Regions Division of the European Central Bank. He holds a PhD in Economics from Mainz University. His main focus at the ECB has been on economic developments and macroeconomic policy issues in Middle Eastern and Mediterranean countries. Before joining the ECB in 2000 he worked at Dresdner Bank and Mainz University.