Coordination Among BRICS Central Banks for Monetary Policy- Why the Need But Why So Difficult?
JeevanKhundrakpamMeeting 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 negativeeg., QE2 in the US & large capital inflows to EMEsNegative (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 analysisPre-New Open Economy Macroeconomics (NOEM)significant gains from monetary coordinationNOEM frameworklittle gains from coordination (ObstfeldandRogoff, 2002)Subsequent models with generalized specification –significant gains from coordinationHowever, monetary policy coordination in practice has not been always forthcoming
Economic Diversity can make Monetary Policy Coordination Difficult
Different exchange rate regimes further complicates coordination
BRICS Monetary Policy Frameworks Diverge
Divergence in CPI Inflations
Incomplete Synchronization of Policy Rates
Economic Linkage is Increasing
Increasing synchronization of business cycle among BRICS and between BRICS with AEsIncreasing trade linkages among BRICS- advanced economies still major trading partnersFinancial Sector linkages (Portfolio, FDI) of BRICS- mostly with advanced economiesThus, 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 inflowsMaintaining stable economic environment for high growth & economic developmentAddressing global commodity price volatilityConcern on inadequate global safety measures in case of simultaneous crisis in BRICSCan these common concerns be better addressed through monetary coordination?
Monetary Coordination- What are the Challenges?
Easier during crisis period – national objectives convergeNormal times coordination could be difficultDivergence in monetary policy objectivesPotential conflict with national interestThe exit from crisis – as an exampleEffective 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 researchSimilarly, spillover needs to be assessed and quantifiedA beginning by IMF, 2011 for 5-systemic economiesA similar and more needs to be done for BRICSNeed to develop a framework for monetary coordinationAddressing fiscal dominance in individual countries is fundamentalMay involve fiscal coordination, which is difficultNeed to develop a code of discipline to safeguard the frameworkBut imposing the code of discipline will be a challenge –more so if diverse interests are involved
Thank You
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