Roundtable Discussions

Recent Challenges to Monetary Policy: How Should the Central Bank React to Persistent Shocks

Date : 12/15/2010

Speakers : Dr. Magda Kandil, the Egyptian Center for Economic Studies (ECES)

The monetary policy framework has progressed since early 2004. Major changes reshaped the strategy of the monetary policy including the ultimate target, the intermediate target and the operational target. Moreover, the implementation framework and the communication strategy have been modernized. This modern framework of monetary policy is facing many challenges.The challenge of relative price shocks has increased in recent years through steep increases in commodity and vegetable prices. These increases were associated with spikes in inflation (quite higher than the implicit target) in 2008 and more recently in 2010. These shocks have not dissipated quickly. They are quite persistent, threatening to raise inflation expectations. The conduct of monetary policy has been complicated by other multiple shocks, including the slowdown in the recovery of the global economy, the volatility of capital flows and its consequences on the exchange rate, and the change in the business sentiment, among other shocks.

How should the central bank respond to the persistent and potentially long lasting relative price shock? Does such shock pose a challenge for the current monetary policy framework? How do multiple shocks complicate the conduct of monetary policy? Given the complexity of the economy, are the conventional instruments already in place enough? These are the key questions addressed by the roundtable discussion.