A FRAMEWORK FOR MONETARY STABILITY

A FRAMEWORK FOR MONETARY STABILITY

FINANCIAL AND MONETARY POLICY STUDIES Volume 27 The titles published in this series are listed at the end of this volume.

A FRAMEWORK FOR MONETARY STABILITY Papers and Proceedings of an International Conference organised by De Nederlandsche Bank and the CentER for Economic Research at Amsterdam Edited by J. ONNO DE BEAUFORT WIJNHOLDS De Nederlandsche Bank, Amsterdam and University of Groningen, The Netherlands SYLVESTER C.W. EIJFFINGER CentER for Economic Research and Tilburg University, The Netherlands and LEXH. HOOGDUIN De Nederlandsche Bank, Amsterdam, The Netherlands SPRINGER SCIENCE+BUSINESS MEDIA, B.V.

Library of Congress Cataloging-in-Publication Data A framework for monetary stability : paper and proceedings of an international conference organised by De Nederlandsche Bank and the CentER for Economic Research at Amsterdam, The Netherlands, October 1993 / edited by J. Onno de Beaufort Wijnholds and Sylvester C.W. Eijffinger and Lex H. Hoogduin. p. cm. (Financial and monetary policy studies ; 27) ISBN 978-0-7923-3173-5 ISBN 978-94-011-0850-8 (ebook) DOI 10.1007/978-94-011-0850-8 1. Monetary policy Congresses. 2. Banks and banking, Central- -Congresses. I. Beaufort Wijnholds, J. A. H. de. II. Eijffinger, Sylvester C. W. III. Hoogduin, Lex H. IV. Nederlandsche Bank. V. Center for Economic Research at Amsterdam. VI. Series. HG230.3.F72 1994 332.4'6-dc20 93-45987 ISBN 978-0-7923-3173-5 Printed on acid-free paper All rights reserved 1994 Springer Science+Business Media Dordrecht Originally published by Kluwer Academic Publishers in 1994 Softcover reprint of the hardcover 1st edition 1994 No part of the material protected by this copyright notice may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without written permission from the copyright owner.

TABLE OF CONTENTS Foreword Introduction ix xi Part A - Thursday October 21,1993 Wim F. Duisenberg Opening Speech by the President of De Nederlandsche Bank 3 David Mullins Jr. Keynote Speech by the Vice Chairman of the Federal Reserve Board: 5 A Framework for Monetary Stability - A Policy Maker's Perspective Session I - The Final Objective of Monetary Policy Charles Freedman Formal Targets for Inflation Reduction: The Canadian Experience 17 Stanley Fischer The Costs and Benefits of Disinflation 31 John Driffill Comment on C. Freedman: Formal Targets for Inflation Reduction: 43 The Canadian Experience Jose Luis Malo de Molina Comment on S. Fischer: The Costs and Benefits of Disinflation 49 Session II - The Position of the Central Bank Alex Cukierman Commitment through Delegation, Political Influence and Central Bank 55 Independence J. Onno de Beaufort Wijnholds and Lex Hoogduin Central Bank Autonomy: Policy Issues 75 Eduard Bomhoff Comment on A. Cukierman: Commitment through Delegation, 97 Political Influence and Central Bank Independe:nce

vi Manfred J.M. Neumann Comment on Onno de Beaufort Wijnholds and Lex Hoogduin: Central 103 Bank Autonomy: Policy Issues Session III - The Design of Monetary Policy Benjamin M. Friedman Intermediate Targets versus Information Variables as Operating Guides 109 for Monetary Policy Otmar Issing Monetary Policy Strategy in the EMU 135 Alexandre Lamfalussy Comment on B.M. Friedman: Intermediate Targets versus 149 Information Variables as Operating Guides for Monetary Policy Paul de Grauwe Comment on o. Issing: Monetary Policy Strategy in the EMU 153 Dinner Speech by Wim F. Duisenberg: To Cut or Not to Cut Interest 157 Rates: Some Remarks on the ERM Part B - Friday October 22, 1993 Session IV - The Application of Monetary Policy Andrew D. Crockett Rules versus Discretion in Monetary Policy 165 Manuel Guitian The Role of Monetary Policy in IMF Programs 185 Jacques J. Sijben Comment on A.D. Crockett: Rules versus Discretion in Monetary Policy 211 Henk Jager Comment on M. Guitian: The Role of Monetary Policy in IMF Programs 217 Session V - Monetary Policy and Exchange Rates Marcello De Cecco and Francesco Giavazzi Italy's Experience within and without the European Monetary System: 221 A Preliminary Appraisal Andre Icard Monetary Policy and Exchange Rates: The French Experience 239 Gunter D. Baer Comment on M. De Cecco and F. Giavazzi: Italy's Experience within 257 and without the European Monetary System: A Preliminary Appraisal Ralph C. Bryant Comment on A. Icard: Monetary Policy and Exchange Rates: The 263 French Experience

Session VI - Monetary Policy in Eastern Europe and Latin America Richard Layard Can Russia Control Inflation? 269 Rudiger Dornbusch Stabilization and Monetary Reform in Latin America 283 Oleh Havrylyshyn Comment on R. Layard: Can Russia Control Inflation? 299 Guillermo Ortiz Comment on R. Dornbusch: Stabilization and Monetary Reform in 305 Latin America Sylvester Eijffinger A Framework for Monetary Stability - General Report 309 List of Participants 331 vii

Foreword Recently, De Nederlandsche Bank in coope:ration with the CentER for Economic Research of Tilburg University organised an international conference on monetary policy. This volume contains the papers, comments and speeches given on that occasion. The organisation of such a conference and the publication of this book were possible only through the efforts of a number of people. More in particular I would like to thank the organising committee (prof Onno de Beaufort Wijnholds, assoc prof Sylvester Eijffinger, dr Lex Hoogduin and Broos van der Werff), Hans Haan the conference manager, Imelda Drubbel and Nicolette Ligtenberg who constituted the conference secretariat, Bert Groothoff who acted as press officer and Eric Schaling for their assistance. A special word of appreciation is due to mrs Bodil Andersen (Denmarks National Bank) and mr Kumiharu Shigehara (Organisation of Economic Cooperation and Development) who accepted the difficult task of chairing the meetings which they did most admirably. Of course, a conference cannot even take place without participants and cannot be a success without good participants. I am very pleased that we could be the host of the eminent group of people who in my view made the conference such a success. Before the conference I thought it would be a one-time-event. After the event I am not so sure. Amsterdam November 1993 Wim F. Duisenberg President of De Nederlandsche Bank ix

Introduction During October 20-23, 1993 an international conference took place at the Grand Hotel in Amsterdam under the theme "A Framework for Monetary Stability". This conference was organised by De Nederlandsche Bank and the CentER for Economic Research of Tilburg University. The aim was to discuss various aspects of monetary policy within a limited circle of high-ranking central bankers and prominent monetary economists from universities and research institutes from all over the world. In fact there were participants from all continents. It was felt that an interaction between central bankers and academics could be a fruitful exercise, not only in terms of an exchange of views, but also because it might contribute to a convergence of thinking on monetary policy. In this volume the papers presented at the conference, the contributions of the discussants, the speeches given and the general report in which the conference was summarised are published. The outline of this book reflects the programme of the conference. After a short opening speech by President Duisenberg (De Nederlandsche Bank) clarifying the theme of monetary stability, Vice Chairman David Mullins Jr. (Federal Reserve Board) delivered the keynote speech in which he gave a policy maker's view of monetary stability. The conference was further organised in six sessions, three sessions on each day. In each session two papers were presented by the authors. Subsequently, comments were given by a discussant followed by a general discussion with the participants of the conference. The subjects of the sessions were: the final objective of monetary policy, the position of the central bank, the design of monetary policy, the application of monetary policy, the consequences of participating in exchange rate regimes for monetary policy, and monetary and financial reform in Eastern Europe and Latin America. At the end of the first day, President Duisenberg gave a dinner speech on recent developments within and the future of the European exchange rate mechanism. Finally, the papers and discussions were summarised and personal conclusions were drawn in a general report by Sylvester Eijffinger (CentER and Tilburg University). In our view, the material in this book covers a wide variety of issues presently discussed with respect to monetary policy. It also makes clear where opinions xi

xii differ and on what grounds. Time will tell whether the conference promoted the hoped-for convergence of views among the participants. However, it certainly increased the degree of understanding of each others position. This was clearly facilitated by the lively discussions that took place in the agreeable environment in which the conference was held (the former council meeting hall of the city of Amsterdam). A list of authors, discussants and other participants is given at the end of this volume. The editors wish to express their gratitude to all the contributors to this volume. They have made it possible that this book can be published relatively soon after the conference by submitting their papers in a timely fashion and by their general willingness to revise them already at the venue of the conference. The issues addressed are therefore still highly topical. We hope the readers will benefit as much from reading the papers, comments and speeches as we enjoyed organising the conference and editing this volume. Amsterdamffilburg November 1993 J. Onno de Beaufort Wijnholds Sylvester C.W. Eijffinger Lex H. Hoogduin