What are the regimes of monetary policy?
Most central banks conduct monetary policy within some sort of monetary policy regime. Such a regime provides a structure for monetary policy decision-making. In addition to facilitating the decision-making itself, this structure enables the decisions to be communicated more easily to the public. The basic monetary regimes are
- a regime with an implicit nominal anchor,
- money targeting,
- exchange rate targeting and
- inflation targeting.
Regime with an implicit nominal anchor
A regime with an implicit nominal anchor involves targeting a particular nominal variable adopted only internally within the central bank without it being announced explicitly. A prerequisite for successful functioning of this regime is high credibility of the central bank, which enables the desired changes in inflation or inflation expectations to be achieved without explicit targets.
Money targeting regime
The money targeting regime focuses on the growth rate of a chosen monetary aggregate. It is based on the finding that in the long term, price growth is affected by money supply growth. A problem, however, lies in the choice of an appropriate monetary aggregate to target. In an environment of financial innovation, market computerisation and globalisation, the relationship between monetary aggregates and the price level is becoming ever weaker. The central bank may also fail to manage the selected monetary aggregate with sufficient precision.
Exchange rate targeting
Under the exchange rate targeting regime, the central bank tries to ensure nominal exchange rate stability vis-à-vis the currency of a so-called anchor country via interest rate changes and direct foreign exchange interventions, thereby "importing" price stability from the country. Maintaining the exchange rate requires an appropriate economic policy mix ensuring a low inflation differential vis-à-vis the anchor country, a sufficient level of international reserves, and the maintaining of the country's competitiveness and overall credibility, including its institutional and legislative framework and political stability. One of the major disadvantages of the regime is the loss of monetary policy autonomy.
Under inflation targeting, the central bank publicly pre-announces an inflation target (or a succession of targets) that it is determined to achieve. This involves active and direct shaping of inflation expectations. This regime's decision-making scheme involves the use of much more information than merely the exchange rate or monetary aggregates, covering the labour market, import prices, producer prices, the output gap, nominal and real interest rates, the nominal and real exchange rate, public budgets, etc. The particular case of inflation targeting in the Czech Republic is outlined on page Inflation targeting.