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The monetary policy framework comprises institutional arrangements to determine and implement monetary policy. It provides an anchor for monetary policy, identifies policy objectives and describes how monetary policy is implemented through a set of instruments and operating and intermediate targets. According to the Bank of Uganda Deputy Governor, Louis Kasekende, and Economic Adviser to the Bank of Uganda Governor, Martin Brownbridge, who are authors of a paper titled: “Post-crisis Monetary Policy Frameworks in Sub-Saharan Africa” presented within the framework of the fifth African Economic Conference which is taking place from October 27-29, 2010, in Tunis, a key distinguishing feature of a monetary policy framework is whether monetary policy is anchored on external or domestic targets.
They point out that most countries with a domestic anchor for monetary policy use a monetary policy framework built around quantitative monetary targets with broad money used as an intermediate target and reserve money as an operating target. The main instruments of monetary policy in these frameworks are primary auctions of government securities and purchases of foreign exchange by the central bank. The authors underscore that in monetary targeting regimes, interest rates play a secondary role if central banks cannot simultaneously determine quantities and prices of money.
They point out that the global economic crisis may have proven to be a watershed for monetary policy in many Sub-Saharan African economies. In the decade or so prior to the crisis, monetary frameworks provided a relatively successful anchor against high inflation. There was less need to use monetary policy for the active management of aggregate demand because this was a period in which the benign external economic environment, with booming commodity prices and inflows of external finance, facilitated robust real output growth.
Monetary policy is likely to be more challenging in the post-crisis period, not the least because the external environment facing Sub-Saharan African economies will probably be less benign and more volatile. The authors of the paper focused on whether monetary policy should be broadened beyond the control of inflation. They discussed what changes should be made to monetary policy frameworks in the medium term. They also shed light on measures to be taken to strengthen the transmission mechanism of monetary policy.
They contend that the implicit assumption underlying the implementation of monetary targeting frameworks in Sub-Saharan Africa is that deviations of outputs from the equilibrium level are not substantial, thus underscoring that monetary policy should focus exclusively on a target for inflation. They further argue that these frameworks have been premised on a flexible nominal exchange rate, with intervention to smooth volatility kept to a minimum so as not to jeopardize domestic monetary targets for international reserve accumulation.
However, they point out that macroeconomic management in the post-crisis period will require a broader view of policy objectives, with greater priority given to stabilizing output and, possibly, exchange rate, alongside inflation control.
As Sub-Saharan African economies develop and become more integrated into global financial markets and require the characteristics of emerging market economies, business cycle volatility is likely to become more pronounced; aggregate demand shocks will become more important relative to aggregate supply shocks, thus creating a role for macroeconomic policy to stabilize output.