BOJ Governor Bats for Autonomy

KINGSTON — Governor of the Bank of Jamaica, Brian Wynter, is batting for a strong and independent Central Bank to achieve the goals important to the Jamaican economy.

Governor Wynter, keynote speaker at the recent 12th Annual Sir Arthur Lewis Institute ofSocial and Economic Studies (SALISES) Conference, at the University of the West Indies (UWI), Mona, described an autonomous central bank as one “insulated from short-term political priorities, by its terms of reference and by its governance provisions.”

He explained that the focus of the institution would be on low and stable inflation, and it would be monitored by reporting to Parliament, and by its implementation of an inflation targeting regime, which has proven to be an effective anchor for inflation expectations in a growing number of industrial and developing countries.

“It would retain responsibility for financial stability, and would thus have the mandate and the wherewithal to respond to potential threats to stability before they arise, and to support, systemically, significant entities where the need arises,” he said.

Detailing the critical steps to autonomy, the BOJ Governor argued that the starting point in offering succeeding generations a much more pleasing environment for price stability, growth and development, is to define what a tolerable rate of inflation is.

He noted that, currently, the medium-term forecasts are built around getting inflation down to a 4-5 percent range, approximately the “collective experience” of our trading partners.

Mr. Wynter declared that there needs to be public consensus, involving the “highest levels of leadership, academia, commerce and an informed public”, on the level of inflation to which the authorities should be held.           

The second step, he said, is to deal with the perennial imbalances in public finances that are the counterpart to the imbalance in Jamaica’s current account.

“These have led to a huge overhang of debt, the servicing of which consumes virtually all of the Government’s tax revenue, and crowds out public investment in infrastructure and social development,” he stated.

He identified the third step as the need for institutional arrangements, to ensure that low and stable inflation becomes the “key responsibility” of the central bank, and that measures are in place to ensure accountability.

According to Mr. Wynter, to achieve this level of autonomy requires only a modification of the legal and operational framework already in place.

He referenced emerging literature on the redesign of central banks, which follows the reputational option and the contractual option. The reputational option, he pointed out, involved delegating monetary policy to a conservative central bank, that then determines policy, consistent with its low-inflation preferences; while the contractual option involves the formulation of strict principal-agent contracts, where inflation targets are still set by elected officials but their achievement is contracted to a central bank empowered with the instruments to implement (the policy).

The Federal Reserve Board of the United States is an example of the reputational option, while New Zealand’s Reserve Bank is often cited as an example of the contractual option.

“Their relative merits are still unfolding but, given the dependence of the reputational solution on the personality of a single institution, the contractual option holds out greater promise of a credible, long-term, apolitical solution,” he said.

The Central Bank Governor prefaced his justification for an autonomous (more independent) central bank, with an examination of a number of options, such as: pegging or fixing the exchange rate; monetary union; dollarisation and the independent central banks.

He however noted that a fixed peg, a monetary union and dollarization, all imply relinquishing discretion over monetary policy.

Against this background, he reignited the debate for a strong and autonomous central bank, whichhe said would “be of our making, could achieve all of the goals that we think are important to our collective well-being, and would see us through the next 50 years, proudly holding Jamaican dollars in our wallets."

By Allan Brooks, JIS Senior Reporter