Inflation Targeting: How Bank of Jamaica is Getting the Temperature Right

Choosing the right monetary policy framework is critical to improving socio-economic outcomes. Yet, when we look at monetary policy frameworks across the region, we largely find a mixed bag of questionable approaches. There are cases where the authorities target jobs, so they create make work programs paid for by debt. Other countries target growth and tend to overspend, driving debt higher. Then there are those who engage in what I would call ‘nothing targeting’ — where no specific policy agenda is articulated, and it is not clear what they are trying to achieve. Finally, there are many countries in this region with what appear to be de facto ‘votes’ targeting regimes, where the authorities conduct fiscal, monetary, and even exchange rate policy in a manner that reflects their ‘short-termism’ — designed to achieve victory in the next general election, at the expense of longer-term socio-economic wellbeing.

The Bank of Jamaica (BoJ) however, is doing things very differently with a clearly defined and communicated inflation targeting policy regime. In fact, it is probably the most well-communicated monetary policy framework in the world! Inflation targeting is a powerful and effective policy framework because it involves, by extension, monitoring many other macroeconomic variables: the exchange rate, interest rates, unemployment, wage rates, trade, international developments, commodity prices, fiscal policy, and many others. All of these factors affect prices and therefore inflation directly or indirectly, and more importantly they affect our purchasing power, real incomes, standards of living, poverty rates, and inequality. Ultimately therefore, inflation targeting is a monetary policy framework that can improve people’s lives and yield better overall social outcomes in a sustained manner.

BoJ’s clearly articulated and communicated inflation targeting policy, consistent policy actions, and on-schedule reporting, support consumer & investor confidence

In the case of Jamaica, the inflation target in the range of 4–6% is not only creating greater price stability, but also predictability in terms of economic expectations. Reforms to the exchange rate regime have seen the JMD fluctuate in both directions and the BoJ has lowered interest rates, lowered the reserve requirement ratio, and carried out foreign exchange interventions to bring the inflation rate up to the target range, while meeting the economy’s other demands. The BoJ regularly communicates its policy actions, which reduces uncertainty and supports private expectations being formed on an individual, investor, and business community level, which is important for overall growth and stability.

Where the authorities in Jamaica must focus more attention now, is to human development outcomes. While Jamaica is making progress in terms of GDP per capita — unlike Trinidad & Tobago and Barbados which have seen declines in recent years — reaching USD5,392 in 2018, and up 55% over the last 20 years, it is still far from the 2030 target of USD23,567.

The poverty rate, which has been falling, stood at 17% in 2016, and is moving in the right direction towards the 2030 target of 10%.

Growth is positive, and consistently so, for the past 5–6 years — again, this is not the case in most of the sovereign English-speaking Caribbean nations.

And a declining unemployment rate like this - that is not as a result of make work programs - again, this is not the norm in the region, and so it is testament to how well the economy is being managed more broadly beyond the Bank of Jamaica.

Finally, the overall crime rate remains too high, with the murder rate rising in recent years. Without social stability and consistent improvements in wellbeing, all the hard-won but well-deserved positive macroeconomic outcomes are at risk of being undermined. I am confident that the Jamaican authorities will show us how it’s done, on this front as well.

See my full presentation on why inflation targeting on the benefits of inflation targeting and what it takes to keep this type of policy regime creating positive outcomes.