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Clarke sees floating exchange rate as best option for BOJ

Clarke sees floating exchange rate as best option for BOJ

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CLARKE… for a long time we have settled on a floating rate regime

Minister of Finance and the Public Service Dr Nigel Clarke has dismissed suggestions that Jamaica replace its system of a floating exchange rate with a fixed system.

The persistent issue arose again on Thursday, as he answered questions arising from his announcement of plans by the Government to modernise the operations of the central bank, the Bank of Jamaica (BOJ), at a special meeting at Jamaica Pegasus hotel in New Kingston

Asked whether the fixed rate system used by eastern Caribbean nations, including Barbados, has not facilitated the “low, stable and predictable” inflation rate on which the soon-to-be-newly independent BOJ will also its monetary policy, he said that Jamaica will stick to a floating rate.

Dr Clarke said that while countries can choose between different exchange rate policies they all have advantages and disadvantages, which have to be taken into consideration.

“Jamaica has been through that debate, and for a long time we have settled on a floating rate regime,” he commented.

“The disadvantage with the floating rate regime is that you have fluctuations in the exchange rate, but the advantages are significant and tremendous,” he said.

He noted that the disadvantage of the eastern Caribbean’s stable-dollar regime is that it removes at least one pillar from the toolkit in responding to the problems.

“In a fixed exchange rate system, your ability to have the rate adjusted in response to a crisis doesn’t exist…Therefore everything has to come through the fiscal,” he stated.

“If you think we are having fiscal compression, then you try moving from a floating rate to a fixed rate regime under our conditions today. In terms of our primary surplus, if we were to change our regime to a fixed one we would have to pursue a primary surplus well in excess of that (seven per cent) for a period of time,” he explained.

“We would have to substantially increase the reserves we have in the Bank of Jamaica, and there are costs which the Jamaican people have signalled, in various ways, that they would rather not have to bear,” he added.

Clarke said that another advantage of the floating regime is that the shocks can be absorbed through the exchange rate, while keeping output and employment at current levels.

“When you don’t have a floating rate regime then the shocks immediately affect output and employment,” he pointed out.

exchange“That is the reason why the people who preceded me (as minister) made the decision that this is the best regime for us, and certainly it is at this time of our development,” he said.

He argued that the results of the last three years have shown that, contrary to the view in the nineties and early 2000s, the floating rate regime was not exclusive of the possibility of low, stable and predictable inflation.

He noted that the 2.8 per cent inflation recorded in the 12-month period up to June this year was far enough below the four to six per cent predicted under the current standby agreement with the International Monetary Fund.

He said that, on that basis, the objective of low, stable and predictable inflation, envisaged under the agreement, was compatible with the arrangements that have been made by the Government.

“We have chosen those arrangements because of the options available; it is the better course for us,” he said.

Announcing new measures to make the BOJ independent of government’s directives in handling the country’s monetary policy, Clarke said that the policy is forward- looking, and would be based on the BOJ’s judgment of where inflation is likely to be in the future-not on what it is today.

He said that if monetary policy is to remain subjected to political influence, monetary authorities could be pressured into pursuing expansionary policies for the short-term impact, which may be electorally convenient while having disastrous longer-term consequences on price stability.

“A central bank under the control or influence of the political directorate can be pressured to sell and squander precious, hard-earned reserves to artificially fix the level of the currency in response to anxiety-even if this undermines inflation objectives, and even if such interventions have no real, lasting effect-simply because it may be politically advantageous for the politician or the administration for that to happen,” he stated.

Clarke said that the reforms, which are to be tabled by October, include a revision of the BOJ’s mandate so as to establish a clear and prioritised policy of price stability which will focus on achieving an inflation target to which all other tools and indicators will be subordinated.

He argued that, as a single measure, the package of reforms, recently approved by the cabinet, represented “one of the most consequential reforms, of the last five years”.

Other features designed to strengthen independence of the BOJ include measures to ensure that the tenure of its board members is long enough to provide for individual independence, and the development of sufficient experience and capability to discharge the functions of accountability, successfully.

By: Balford Henry

Original Article Found Here

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Charles Hyatt Being positive is a lifestyle and I live everyday loving the fact that I'm living every day. Each time I help someone smile, it reiterates the power of Good. So, I think, talk, eat, drink, Good News.

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