F&D:
Apart from inflation targeting, do you see other workable choices for
countries that would like to move to greater exchange rate flexibility?
Monetary targeting?
BW:
It depends on country conditions. In Jamaica, we have tried every variety.
In the 1990s, when we were targeting monetary aggregates, we discovered
that for us it did not work. The variables did not perform, and the link
between the variables and inflation broke down. And I think this has been
shown in studies in other countries.
The exchange rate regime is a deep policy choice with significant
consequences. But you need policy toolkits that can work with the choice
you have made, and Jamaica is better placed to build a resilient and
prosperous economy with a flexible exchange rate.
F&D:
There has been discussion of integrating policy tools—interest rates,
foreign exchange intervention, macroprudential measures, and capital
controls—into an overall framework. What are the prerequisites for
doing this successfully in small open economies?
BW:
In Jamaica, which is a hyper-open developing economy, we will need many
years to get each of these components working well enough, before the
integration question is more than academic. That does not mean that we
should not start thinking and looking at these things together. Fiscal and
labor policies must be fit into this unified macro framework.
You can reach more sophisticated combinations eventually, but it is
important not to get too caught up in this when there is a big fiscal
deficit that needs to be fixed.
Persistence, focusing on and fixing one thing at a time, getting each one
right—in the right sequence—is the main secret of success of many of the
countries that have grown most strongly.
F&D:
Speaking about one element of the framework, foreign exchange
intervention, do you see a benefit to having some rules here?
BW:
The central bank needs to have some simple and clear rules about foreign
exchange intervention. It reassures people. Many stakeholders want this.
But it is not black and white. In implementing rules, central banks must
preserve a degree of discretion. They must also have overwhelming power to
move the market. You put a couple of businesspeople together and they will
try to find a way to make the most money, and you may end up privatizing
gains and socializing losses. A central bank needs to safeguard the market
against that sort of outcome. You need some rules, but you must preserve
the ability to disrupt bad behavior.
F&D:
How do you see the role of communication in building public support and
understanding?
BW:
The role of communication is enormous. When in 2018 we were going for
greater independence, I felt the most important thing for the central bank
would be its relationship with the public. It is all about the public in a
democratic country.
We were paying a lot of attention to the machinery of monetary policy, the
technical aspects, which is important. Yet you can get half of this wrong
and still be right. But you cannot get communication wrong and still be
right. I always thought that the machinery was maybe 30 or 40 percent of
the central bank’s focus, and communication 10 percent. But I have since
switched it around: communication is 30 or 40 percent.
In a way, that is what monetary policy has always been about. What will the
stakeholders think? How are they going to react? Are they going to go out
and shop more or not? Are they going to buy more foreign exchange or less?
