Monetary and credit policy: tutorial

ISBN 978-601-04-3010-5  © Nurgazina А.М., Assilova А.S., 2017
© Al-Farabi KazNU, 2017
Exchange rate targeting can make it possible to quickly and effectively decrease a high level of inflation, which is important during crisis periods. Such a regime increases the transparency and clarity of the central bank’s monetary policy. If the na...
Targeting of the foreign exchange regime in individual countries (Chile, Brazil, Columbia, Tunisia) was conducted by establishing goals for the real exchange rate.
The experience of Chile and Tunisia was successful in doing this, which reduced the level of inflation considerably. In Chile, during the period of applying a regime of targeting a benchmark for the real exchange rate, the level of inflation decreased...
A key shortcoming of forex exchange rate targeting is the impossibility of pursuing an independent monetary policy in free mobility of capital and the complexity of responding to internal shocks. For example, an increase in interest rates in Germany i...
Risks of speculative attacks on their national currencies are another problem for countries targeting forex exchange rate. Speculative attacks in September 1992 on the currencies of countries pegged to the German mark exchange rate can serve as an exa...
Strategies of currency pegging and dollarization can be considered the most popular strategies reducing currency regime risks.
Currency pegging assumes that the domestic currency is backed 100% by foreign currency, and the central bank establishes a fixed exchange rate and is ready at the request of the population to exchange domestic currency at this exchange  rate.
The advantages of currency pegging are control of the money supply and also a stricter obligation of the central bank to adhere to the fixed exchange rate and thus in short time periods help to decrease inflation and reduce speculative attacks on the ...
Argentina’s experience is interesting, which abandoned the currency peg to the US dollar in 2002. In the initial stage, this regime enabled the country to decrease inflation significantly (from 800 percent to 5 percent) and accelerate economic growth ...
Another method of solving the problem of non-transparency of exchange rate targeting is dollarization, i.e., adopting a hard currency like the US dollar as the country’s currency. The main advantage of dollarization is precluding the possibility of sp...
In addition to the advantages, exchange rate targeting has a number of serious shortcomings. The need to maintain the exchange rate in the event of speculative attacks can lead to a significant decrease in the level of gold and foreign exchange reserves.
In conditions of mobility of capital, fixing the exchange rate takes away the possibility of pursuing an independent monetary policy and, consequently, to react to internal shocks of the economy. The nature of the central bank’s monetary policy will t...
Establishing exchange rate goals is aimed at solving problems in a short time period. The influence of a stable exchange rate on long-term trends is not welldefined, since the stability of the nominal exchange rate does not ensure stability of the rea...
In the 1970s, the monetary targeting regime gained special popularity among the central banks of developed countries such as Great Britain, Canada, Japan, Germany, Switzerland, and the US.
Monetary targeting is often used in countries with a transitional economy to curb high inflation. The main advantage of monetary targeting compared to foreign exchange targeting is that it provides the central bank extensive opportunities to pursue mo...
In addition, this strategy is characterized by great flexibility in adjusting monetary policy. The result of measures taken by the central bank is manifested almost immediately. The central bank directly influences money supply and has the ability to ...
However, one can single out a number of objective reasons making it impossible to use this monetary policy receive by central banks.
All the advantages cited above depend on whether or not a strong and stable link exists between the strategic target variable, for example, and the level of inflation and the chosen monetary aggregate. Otherwise, having achieved the intermediate monet...
In addition, it often does not appear possible to obtain and estimate of the demand for money in countries with a transitional economy. Furthermore, the dependence of the national economy on the foreign economic situation increases the likelihood of e...
The complexity of determining a change in the velocity of money, the structure of money supply and the money multiplier, the volatility of money velocity, and the demand for money in the short term, especially taking into account its susceptibility to...
Central banks practicing the monetary targeting regime have achieved various successes in ensuring price stability. Among developed countries, Germany has demonstrated the greatest successes in monetary targeting.
The National Bank of Kazakhstan had experience in conducting monetary aggregate targeting prior to 2000. The main reason for abandoning this regime was its ineffectiveness. The rate of grow of the monetary base did not correspond to the dynamics of in...