This article, firstly written in French, was published in a
Moroccan Journal "LE SOIR ECHOS", n° 269
Friday, march 8th, 2009
The effectiveness of monetary policy between
rhetoric and reality (*)
During the last decade, the alleged
approach "global best practice" to be
adopted by central banks has not focused on
economic growth or job creation, but on price
stability, as reflected in the Statutes of Bank
Al Maghrib (Article 6). This choice is dictated
by the fact that the only economic variable
on which the central bank has a direct and
lasting impact is the rate of inflation. This
orientation of monetary policy to control
inflation, so defended by the monetarists in
particular M. Friedman (1968), is considered
as a best practice promoted by the
International Monetary Fund (IMF). This
institution provides several developing
countries with technical assistance to prepare
them for adopting inflation targeting policy.
In parallel, it should be noted that the
problems of unemployment, growth and
poverty are issues that take currently the
forefront at the international level.
In this context, should we emphasize
that the IMF experts believe that economic
growth should be sustained at 7% per year
or more to achieve the Millennium
Development Goals (MDGs) and halve
poverty on the horizon 2015. This statement
means that IMF conditionality, focusing on
balanced financial, has become obsolete,
even in contradiction with the mode of
anchoring of monetary policy such as
"inflation targeting" that recommended
around the world.
Dr. Kamal El-OUALY
Economist
Kamal.eloualy@yahoo.fr
However, this orthodox approach
teaches us that monetary policy is principally
focused on price stability, with an implicit
claim that if inflation is under control,
economic growth, job creation and poverty
reduction will follow.
According to this approach sponsored
by the IMF, the objectives and the instruments
of the monetary policy are they narrowed ?.
Much more, its application confronted at the
fact evidence, in particular in a context of
financial crisis and the serious threats of the
recession and deflation for the world
economy, militates for a change of the
monetary policy priority ? In particular in the
countries where the economy and the
financial system are still fragile and whose
shock resistance is still low.
About the implementation of
monetary policy, central banks use a single
mechanism, the interest rate, to boost the
economy in crisis and at the same time focus
on maintaining stability price. We can say
that is not an efficient monetary policy. If
there are two independent objectives, the
Tinbergen rule (Nobel Prize 1969) for
efficient policy making, prescribes an
independent policy instruments, to conduct an
appropriate economic policy without falling
into the paradox of credibility. This argument
is also corroborated by the fact that the
implementation of a strategy of inflation
targeting depends also on the financial
stability, which taught us that the
management of liquidity should be
distinguished from the question of orientation
of monetary policy. The latter, which aims to
achieve price stability over the medium and
long term could not realize this objective if
other goals as important rises to the surface.
In this situation, central banks are
facing a trade-off between several
objectives with a single instrument, which is
the interest rate. This highlights the loss
function of the central bank which gives rise
to controversy: price stability, financial
stability, management of liquidity or
economic growth ? In particular the issue of
adequacy of macroeconomic policies and the
inflation targeting. Indeed, without
coordination with an appropriate fiscal
policy, monetary policy may lose much of its
effectiveness particularly in a context of
financial crisis where the risks of deflation
becomes reality.
(*) This article is one of the works series performed by
the author on monetary economics and inflation
targeting. For more information cf, Kamal EL-OUALY
“The inflation targeting in emerging countries: Its
implementation opportunities in Morocco”. Doctorate in
Economics Sciences with High Honours from the Faculty
of Economics Sciences of Fez, may 2008.