EVOLVING MONETARY POLICY FRAMEWORKS
62 INTERNATIONAL MONETARY FUND
Show a strong resolve to make policy more
effective even in difficult times (rather than
waiting for ‘better moments’). Unless absolutely
necessary, do not wait for legal changes, but
start applying the principles in practice, as soon
as there is a sufficient political consensus
Avoid having two nominal anchors. If they
already exist, resolve conflicts consistently in
favor of the inflation anchor
Split monetary policy formulation from
implementation and supervision
When using several instruments with a primary
impact on the monetary policy stance, use
them consistently; avoid using these
instruments for different objectives
Do not be pre-occupied with complicated
financial stability concepts. Financial stability in
LLMICs mostly means solvent banks and
functioning FX markets thanks to the simplicity
of the LLMIC financial systems
How to move away from exchange rates as intermediate targets during the
modernization process
Do Do not
Set up a high-level coordination task force with
enough authority
Do not over-prepare, but move steadily seizing
every opportunity (in particular increase the
flexibility under appreciation pressure)
Invest into a functional spot and derivative FX
market, including by supporting market making
activity by banks, encouraging the functioning of
trade organizations (such as the forex club, ACI
etc.)
Do not liberalize the capital account too fast
(before sufficient exchange rate flexibility is put
in place). Liberalization should follow (rather
than precipitate) greater exchange rate flexibility
Keep the exchange rate flexible in both
directions, even if in a narrow corridor (minimum
+/- 3%) to help the market develop
Do not provide implicit exchange rate
guarantees: (a) always conduct
interventions/construct bands so that there is a
two-way risk for market participants, (b) refrain
from referring to the exchange rate in policy
communication, (c) the interest rate should react
to inflation, not the exchange rate per se.
Make efforts to channel the FX proceeds from
the transactions with the government back to
the market
Don’t blame rapid exchange rate movements on
the speculative behavior of banks. They rarely
are the culprits (especially when tight net open
position and trading limits are in place)
Encourage the government to issue domestic
currency debt at benchmark maturities in
sufficient quantities to form a yield curve and
help integration of the money and FX markets
Avoid pulling in different directions with FX
interventions and the key policy rate
Actively promote money market development,
e.g., by instituting master repo agreements,
promoting the establishing of the reference
Do not use FX intervention to defend exchange
rate levels. Communicate FX interventions as a
consistent part of the policy framework working