The two basic parts of policy making are strategy and implementation. The structure that connects micro-level operational methods to macro-level strategy, is called the monetary policy framework. In this segment, we'll provide a description of the typical elements of most monetary policy frameworks using regional examples. We will ask a basic question. How does society structure monetary policy to reach good outcomes? After viewing this segment, you should be able to; one, identify the four main parts of the monetary policy framework. Monetary policy consists of several interconnecting parts. Fortunately, we can construct a framework for the various elements of policy making, general enough to apply to most of the economies of the world. The monetary policy framework can be viewed from the big picture level of policy strategy. The framework can also be seen with a focus on the details of policy implementation. In this week's module, we'll discuss the micro-economics of monetary policy implementation. Before we move to that, let's briefly introduce the key elements of macro-economic strategy as a preview for the following week. The political process of society sets out broad goals for monetary policy. Goals represent the ultimate objectives of policy makers. Many of the central banks of the region defined their primary objective is centered around stabilizing the prices of goods and services. This slide lists some publicly stated goals given by the monetary authorities themselves. We'll go through them quickly. So, wait until the end of this slide to read them. We can see the policy objective of Thailand, Malaysia, Korea, Japan, Singapore, Philippines, and Indonesia. One common phrase stands out, price stability. Each of these central banks has the ultimate goal of achieving a predictable path for the value of the currency in purchasing power terms. This reduces the risk that members of the public will face surprise changes in their cost of living. There are exceptions. The Hong Kong Monetary Authority defines a stable external exchange value of the currency of Hong Kong as its primary goal. The People's Bank of China specifies a goal of maintaining the value of the currency in the broadest terms. Still, we see that most central banks define their strategic goal as price stability. A key part of achieving the strategic goal is the intermediate target, which is a closely related macroeconomic variable, which can be guided by policy makers, and which anchors the public to understanding of the strategic goal. The International Monetary Fund categorizes monetary policy frameworks by the macro economic indicator used as an intermediate target. The Central Bank targets a specific numerical range for the path of the targeted variable. We sometimes call the targeted variable, the intermediate target, as it connects the implementation of monetary policy and the closely connected ultimate strategic goal. It is often the case that the intermediate targets are direct numerical representation of the ultimate goal. For example, Thailand's goal is price stability. So, their country has adopted an inflation targeting framework. This framework focuses on a numerical target for inflation, defined as the growth rate of prices. Many of the economies of the Asia Pacific have also adopted inflation targeting. These include Indonesia, Japan, Korea, and the Philippines. Some countries adopt an exchange rate anchor. Hong Kong and Singapore focus on the value at which domestic currency is exchanged for the currency of major trading partners. Not every country chooses a clear intermediate target. China and Malaysia combine multiple anchors to pace the value of currency. The current trend in monetary policy is to publicly announce the projected target path, which anchors the public's expectation of the future value of the currency. Thus, the intermediate target is also referred to as a nominal anchor. For example, inflation targeting anchors expectations of the future cost of living. Anchoring expectations reinforces the ultimate goal. Now that we've seen this strategy consists of the goals and the intermediate target of the monetary policy framework, let's move toward implementation. Monetary policy will attempt to achieve day to day stability in a specific financial market. The operational target specifies what will be stable on an ongoing basis. Monetary policy of many of the economies of the region, are committed to an ongoing target. Operational targets usually have two parts. The first part is a fix policy rate set directly by authorities for the key procedure. For example, in early 2017, the one day bilateral repurchase rate is set at 1.5 percent every day in Thailand, other central banks had similar rates. These are sometimes one day interest rates as in Thailand, but not always. For example, in China, Korea, and Indonesia, the policy rate may be an interest rate on one week lending. The second part is a particular money market interest rate that will be actively guided toward the policy rate. Usually, the target rate is the rate at which commercial banks lend money to each other overnight. For example, the overnight Bangkok Interbank offered rate, the rate at which banks in Thailand, lend Thai baht to each other is guided toward 1.5 percent on an ongoing basis. There are other similar interest rates and other regional markets that are brought on target by policy operations. Most of the key interbank rates that are used for targeting monetary policy are an overnight interest rate, though not necessarily. China, Singapore and Hong Kong, do not explicitly target a specific interbank rate. However, monetary authorities also maintain monetary policy operations to stabilize the interbank lending rates. The final part of the monetary policy framework are monetary policy instruments. The instruments will be the direct means of intervention in the interbank market. In all economies, in and out of the region, monetary policy instruments are delegated to a specific institution called a central bank. Monetary policy instruments are used by the central bank to control the liquidity available for transactions in goods and services and financial markets. To review how this links together, remember the monetary policy framework includes both the narrow focus of implementation and the broad scope of strategy. But we have also raised many questions, why is government policy delegated to a bank? How did the central bank instruments affect the availability of liquidity for transactions? How does this liquidity affect operational targets like short-term interest rates? How do short-term interest rates connect to the intermediate targets like inflation? How does anchoring the public's expectation of inflation impact the goal of price stability? Why is price stability such an important goal anyway? In the next two modules, we will address each of these questions. After viewing this segment you should be able to, one; identify the four main parts of the monetary policy framework. A monetary policy framework connects the operational methods of the central bank to its broader strategic goals. The monetary policy framework includes; goals, an agreed upon achievable macroeconomic objective. Most commonly this is price stability. Intermediate targets, a specific numerical benchmark for a macroeconomic variable linked to the goal. These are usually inflation or the exchange rate. Operational targets, a day to day numerical benchmark for a financial market variable that can influence the intermediate target. Often this is the interbank interest rates. Tools, the tangible functions that allow the central bank to guide markets.
