In recent years, central banks in many emerging markets have improved their monetary policy frameworks by, among other things, making it clear that their main policy objective is to achieve price stability. These efforts have been supported by considerable investment in forecasting and policy analysis systems (FPAS) to help guide policy decisions.
To reflect on the regional experience, on October 18-20, 2016 the JVI held a workshop on “Monetary Policy Modeling: Forecasting and Policy Analysis.” The peer-to-peer event brought together representatives from eight central banks in Eastern Europe and Central Asia (Armenia, Belarus, Georgia, Kazakhstan, the Kyrgyz Republic, Moldova, Russia, and Ukraine) and from the JVI, the IMF, and OGResearch, a Prague-based consultancy.
The participating central banks each provided a comprehensive view of their FPAS. The discussion was lively and far-ranging, reflecting the many facets of the topic and the variety of national experiences.
State of Affairs
A central aspect of the discussion was the use of a core macro model for medium-term forecasting. All the central banks participating have tailored their own systems to their specific circumstances, often with support from the IMF. The emphasis has been on simple models, reflecting the importance of being able to tell simple stories about the state of the economy and the inflation outlook. The banks have also reorganized internally to align the work done by staff with the needs and the decision cycle of policymakers.
The central banks that have made the most progress were emphatic about the benefits of having a highly structured approach. It has allowed them to improve the quality of their forecasts and the analysis of uncertainty, for example in Russia during its recent episodes of financial turbulence. Policy has also become more forward-looking by extending the forecasting horizon, as in the case of Armenia.
The analysis that emerges from a more structured approach has also become the centerpiece of central bank external communications, contributing to policy that is more transparent and effective. The National Bank of Georgia offers a case in point: in addition to its inflation forecast it now publishes a forecast of the policy rate over the medium term to provide more explicit guidance about the stance of policy going forward.
Overall, FPAS usefulness for policymaking has become more apparent over time and has helped improve confidence in the ability of central banks to deliver on their inflation objectives. Further investment in FPAS capacity is therefore to be expected, especially in countries just beginning to modernize their monetary policy.
Peer-to-Peer Initiatives and ICD Training
The workshop was related to other IMF/JVI regional initiatives on monetary and exchange rate policy, most notably two Caucasus and Central Asia Central Bank Practitioners Fora (one in January 2016 and one this January) which brought together high-level officials to discuss monetary and exchange rate policy issues relevant for that region. There is growing demand for this type of event as central bank staff seek to learn from the experience of their peers. Given its country coverage, facilities, organizational experience, and in-house expertise, the JVI has emerged as a natural platform for such exchanges.
The workshop also complements ICD country-specific customized training and courses. For example, the revamped “Monetary Policy Analysis and Forecasting Course,” which provides an introduction to the macro models discussed during the workshop, was delivered for the first time at the JVI the following week.
Rafael Portillo, Senior Economist, JVI