JVI Hosts High-Level Workshop for Central Bankers from CCA, Moldova and Mongolia

The JVI hosted the sixth IMF-JVI-Swiss National Bank (SNB) Peer-to-Peer Central Bank Practitioners Workshop February 27–March 1, 2019, for officials from the Caucasus and Central Asia (CCA), Moldova, and Mongolia. Workshop participants discussed the challenges they face in building up their monetary policy transmission mechanism and improving their modelling and communications strategies in order to make their financial operations and instruments more effective and refine central bank (CB) governance. This year's event reduced the number of sessions to give more time for exchange and contained one session co-led by the Central Bank of Armenia and the National Bank of Georgia.

The workshop, sponsored by the SNB, brought together representatives from the CBs of Armenia, Azerbaijan, Georgia, the Kyrgyz Republic, Tajikistan, Turkmenistan, Uzbekistan, Mongolia, and Moldova and from the JVI, the IMF, the SNB, the Oesterreichische Nationalbank, and the Czech National Bank (CNB). Professor John Taylor from the Stanford University, who actively participated in all sessions, was a special guest of the event.

The workshop first discussed the experience of practitioners in improving national monetary policy transmission channels. The main tasks on their agendas were deepening financial markets, limiting dollarization, and mitigating the effects of commodity prices on the economic cycle. Those results can be achieved through building up markets and better coordinating monetary and fiscal policy. Improving communication to shed light on the nature (permanent or temporary) and source (supply or demand) of shocks and forward guidance was viewed as central to financial market development. Some participants shared their success in bringing inflation back to targets after their economies were hit by shocks. Such efforts are crucial to build credibility and help the market to understand standard CB behaviour. 

The participants agreed that use of monetary policy models, which is widespread, requires skill in communicating the results to policymakers and the public. Moving from model outcomes to policy decisions is often complicated, calling for frequent cooperation between sectoral specialists, modellers, and policymakers. On the one hand, models are necessarily stylized, lacking details; on the other, their increasing complexity magnifies the risk of using them as black boxes. Moreover, motivating and retaining highly specialized staff is a demanding managerial task, but is necessary to retain the analytic expertise that has been built.

The discussion on monetary policy rules was framed by a presentation by Prof. John Taylor, who spoke on the design of policy rules to help guide and communicate decisions. He pointed out that CBs may deviate from their rules, but if they do so, they should explain why. Jan Vlcek shared the experience of the CNB in designing the policy rules that have served its decision-making process well for more than 15 years. Participants stressed that it is important for CB staff to recognize the preferences of policymakers with regard to the inflation-output volatility trade-off.

The main challenges of liquidity management are related to large liquidity surpluses, which affect the ability of CBs to influence interest rates. Segmentation of liquidity and interbank markets is a continuing concern, as are costly sterilization operations. Liquidity problems appear to reflect structural issues, such as weak treasury management and lack of demand for credit.

Most CBs in the region continue to use intervention in foreign exchange (FX) markets as an operational tool, which could blur somewhat the clarity of their monetary policy. Among issues participants identified were assessing equilibrium exchange rates, dealing with overshooting, and sterilization. They agreed on the desirability of limiting their FX interventions in order to heighten monetary policy transparency and efficiency.

The discussion of governance focused on management structures, operational independence, and transparency. A key issue was the nexus of financial relations with the government. That may become more complex as costs rise for monetary and FX operations and they must engage more with troubled financial institutions.

Participants evaluated the workshop as an excellent forum to share experiences. Discussions were frank and forward-looking. CB officials were particularly candid in describing the difficulties of designing frameworks for monetary policy, FX operations, and relations with the government and the banking sector. Guest speakers commended the candor, focus, engagement, and ownership observed during the workshop. Participants expressed their gratitude for the IMF’s policy advice and capacity development support; they emphatically welcomed the planned establishment of the opening of the new IMF technical assistance centre in the region.

Tibor Hlédik, Lead Economist, JVI