Coordination Among BRICS Central Banks for Monetary Policy- Why the

Need But Why So Difficult?

Jeevan Khundrakpam

Meeting of BRICS Economics Research GroupNIPFP, February 27, 2012

Why Coordination is Important?

• Economies are increasingly getting integrated through various channels (trade, finance, etc)

• Economic policies have spillover effects, positive as well as negative– eg., QE2 in the US & large capital inflows to EMEs

• Negative (threat to price and financial stability, commodity price volatility)

• Positive (improvement in US economy and benefit to EMEs)

Do Spillovers Necessitate Coordination?

• Is an ongoing debate in theoretical analysis– Pre-New Open Economy Macroeconomics (NOEM)

• significant gains from monetary coordination

– NOEM framework• little gains from coordination (Obstfeld and Rogoff, 2002)• Subsequent models with generalized specification –

significant gains from coordination

• However, monetary policy coordination in practice has not been always forthcoming

Economic Diversity can make Monetary Policy Coordination Difficult

Key Macro-economic Indicators: 2011

GDP PPP(Billion

USD)

Per capita

GDP (USD)

CAB (% GDP)

Savings (% GDP)

Investments

(% GDP)

Fiscal Balance (% GDP)

Reserves

(billion USD)

Unemployment rate

Brazil 2,309 12,917 -2.3 17.3 19.8 -2.6 352 6.7China 11,316 5,184 5.2 53.8 48.7 -2.0 3181 4.0India 4,470 1,527 -2.2 35.4 37.6 -8.5 297 NARussia 2,376 13,236 5.5 28.2 22.7 0.5 499 7.3

South Africa 555 8,342 -2.8 16.6 19.4 -4.9 49 24.5

Different exchange rate regimes further complicates coordination

BRICS Monetary Policy Frameworks Diverge Country Monetary Policy Framework Key Monetary Policy Tools Objectives

Brazil Inflation Targeting Interest rate (Selic rate): interest rate on

overnight interbank loans collateralised on

federal debt instruments.

Inflation- Point target of 4.5 per cent

with +/- 2 percentage points for headline

CPI

Russia No single target indicator

- Inflation (CPI) target for 3-years period

- Managed floating exchange rate regime

Refinancing rate, Reserve requirements To ensure stability of national currency

India Multiple Indicators Approach Repo rate , CRR and SLR Maintaining price stability, financial

stability and

ensuring appropriate flow of credit to

productive sectors.

China Multiple Indicators Approach Reserve requirement ratio,

Central bank base interest rate,

rediscounting, Central bank lending, Open

market operation and other policy

instruments specified by the State Council

Maintain the stability of the value of the

currency and thereby promote economic

growth.

South Africa Inflation Targeting Key policy rate – repurchase rate Inflation target range for headline CPI of

3-6% combined with financial stability

objective.

Divergence in CPI Inflations

Mar/05

Jun/05

Sep/0

5

Dec/05

Mar/06

Jun/06

Sep/0

6

Dec/06

Mar/07

Jun/07

Sep/0

7

Dec/07

Mar/08

Jun/08

Sep/0

8

Dec/08

Mar/09

Jun/09

Sep/0

9

Dec/09

Mar/10

Jun/10

Sep/1

0

Dec/10

Mar/11

Jun/11

Sep/1

1

Dec/11

-5

0

5

10

15

20

Brazil Russia India China South Africa

Incomplete Synchronization of Policy Rates

Mar/05

Jun/05

Sep/0

5

Dec/05

Mar/06

Jun/06

Sep/0

6

Dec/06

Mar/07

Jun/07

Sep/0

7

Dec/07

Mar/08

Jun/08

Sep/0

8

Dec/08

Mar/09

Jun/09

Sep/0

9

Dec/09

Mar/10

Jun/10

Sep/1

0

Dec/10

Mar/11

Jun/11

Sep/1

1

Dec/11

0

2

4

6

8

10

12

14

16

18

20 BRICS key policy rates

Brazil Russia India China South Africa

per c

ent

Economic Linkage is Increasing• Increasing synchronization of business cycle among

BRICS and between BRICS with AEs • Increasing trade linkages among BRICS- advanced

economies still major trading partners• Financial Sector linkages (Portfolio, FDI) of BRICS-

mostly with advanced economies• Thus, domestic monetary policy in BRICS has to take

cognizance of the strong inter-connectedness with advanced economies

Common Monetary Policy Concerns• Some common set of issues relevant to monetary

policy have emerged such as,– Managing large and volatile capital inflows– Maintaining stable economic environment for high

growth & economic development– Addressing global commodity price volatility– Concern on inadequate global safety measures in case

of simultaneous crisis in BRICS• Can these common concerns be better addressed

through monetary coordination?

Monetary Coordination- What are the Challenges?

• Easier during crisis period – national objectives converge

• Normal times coordination could be difficult• Divergence in monetary policy objectives

– Potential conflict with national interest– The exit from crisis – as an example

• Effective coordination most likely “in the context of broad comity among nations” (Eichengreen, 2011)

Monetary Coordination- What are the Challenges?• Linkages need to be understood properly through research• Similarly, spillover needs to be assessed and quantified

» A beginning by IMF, 2011 for 5-systemic economies» A similar and more needs to be done for BRICS

• Need to develop a framework for monetary coordination – Addressing fiscal dominance in individual countries is fundamental– May involve fiscal coordination, which is difficult

• Need to develop a code of discipline to safeguard the framework

• But imposing the code of discipline will be a challenge –more so if diverse interests are involved

Thank You