Challenges and Successes in Treasury Engagement on Monetary Policy

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Challenges and Successes in Treasury Engagement
on Monetary Policy

• John B. Taylor
• Under Secretary for International Affairs
• United States Treasury
• Central Bank of Peru
• Lima, Peru
• September 6, 2004

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Iraqi Monetary Policy

• Iraq faced variety of monetary problems at end of
  war
• Legacy of monetary policy mismanagement and
  inflation
• Lack of central bank independence
• Lack of unified, stable currency
• 2 currencies in circulation, with limited
  denominations
• Absence of security features on Saddam dinar
• Sharp depreciation of Saddam dinar relative to
  Swiss dinar

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Monetary Policy Achievements

• Post-War
• Established independent central bank
• Conducted currency exchange
• Ran from October 15, 2003 to January 15, 2004
• Introduced new currency with 6 denominations,
  based on designs from old Iraqi dinars
• Exchange went remarkably well
• Value appreciated about 25
• Provided technical assistance to
• Develop daily currency auction
• Establish new central bank law
• Create monetary framework
• Introduce new monetary instruments
• Produce necessary monetary data

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New Iraqi Dinar
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Waiting to Exchange Dinar
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Exchanging Old Dinar
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Destroying Old Dinar
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Afghanistan

• Initial Currencies
• Official Afghani
• Duplicate Afghanis from Government in Exile
• Warlord-Issued Counterfeits
• Foreign Currencies

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Finance Minister Ashraf Ghani, Treasury
President Ehsan Assadi, U/S Taylor and Amb. Paul
Speltz. Explaining existing manual payroll
procedures at the Finance Ministry.
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Monetary Policy Issues

• Choice of Currency
• Objective Price Stability
• Exchange Rate Regime
• Monetary Target

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Touring Da Afghanistan Bank (the central bank).
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Argentina Quasi-Currencies

• Origins
• Fiscal constraints resort to creative financing
• 12 of 24 provinces issued own currencies federal
  government issued its own quasi-currency (lecop)
• At peak, quasi-currencies were 1/2 of all
  currency in circulation and 1/3 of monetary base
• Consequences
• Central bank loses ability to control entire
  monetary supply
• Demand for official currency that central bank
  does control because unpredictable. Interest
  rates and exchange rates become unpredictable.
• Fragmentation of monetary space fragmentation
  of market for goods/ services. Fluctuating
  internal ex-rates. No reliable medium of
  exchange
• Difficulty in launching IMF program as difficult
  to predict money demand and set monetary targets
• Solving the Problem
• IMF transitional program launched in January 2003
• Argentine government initiates buyback that
  virtually eliminate quasi-currency stock by
  end-2003
• 2003 inflation is 4 vs. 2002 inflation of 42

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Uruguay Run on Dollar Deposits

• Context
• 90 dollarized financial system
• History of macro stability, offshore banking
  sector
• Crisis
• Inflows of deposits from Argentina. Inadequate
  reserve backing
• Withdrawals by Argentine depositors after
  imposition of deposit freeze in Argentina.
  Spread to non-residents, given concerns about
  inadequate dollar reserves questions about
  government fiscal sustainability
• Policy Response
• IMF loans to build reserves in spring/early
  summer insufficient to stop run
• Mobilization of IMF/WB/IDB money to provide full
  backing for certain categories of deposits. USG
  short-term bridge loan to re-open banks.
• Results
• Guarantee stopped run and prevented collapse of
  payment system
• Fiscal measures restored confidence in government
  finances
• Return to robust economic growth

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