Armenia’s Radical New Monetary Policy Approach | Governor Martin Galstyan & Armen Nurbekyan
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Timestamps:
0:00 - introduction
3:11 - history of central banking Armenia
11:06 - how CBs set the interest rate
12:57 - why a policy system is needed
28:10 - if there is no system
35:02 - why a new system is needed
42:14 - Bernanke's Bank of England review
44:37 - the problem with CB forecasts
49:51 - Armenia's Russia Ukraine example
52:15 - Scenarios for Armenia's Future
1:00:35 - The Advantage of Scenario Thinking
1:06:11 - Extreme Scenarios
1:11:15 - conclusion
MAIN CHANNEL:
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Guest:
Host: Dr. Joeri Schasfoort @Money & Macro
Guests: governor Martin Galstyan and deputy governor Armen Nurbekyan
Follow up discussion in relation to Ben Bernanke's review of the Bank of England here: th-cam.com/video/j2Q80y14kKY/w-d-xo.htmlsi=vqf3WtuZT3ZWxZ0C
Thank you for taking the time to interview them.
🎯 Key Takeaways for quick navigation:
00:00 *💱 Armenia's central bank adopts a scenario-based monetary policy, departing from traditional single-expectation forecasting, aiming to manage uncertainty better post-Covid inflation.*
00:57 *📊 Armenia's Forecasting and Policy Analysis System (FPAS) transitions to FPAS Mark two, emphasizing scenario analysis, aiming for more predictable monetary policy communication.*
02:52 *📈 The Central Bank of Armenia shifted from monetary targeting to inflation targeting in 2006, prompting the development of the FPAS framework to guide systematic monetary policy decisions.*
06:18 *💵 Armenia's former monetary policy focused on controlling money supply based on the belief in its direct correlation with inflation, transitioning to inflation targeting due to the realization of other influential factors.*
09:17 *🎯 Central banks like Armenia's aim to manage inflation expectations to influence economic behavior, fostering confidence through credible promises, especially after adopting inflation targeting policies.*
11:14 *📈 Setting interest rates is not just about the current rate but also about shaping future expectations through clear communication, especially in Armenia's FPAS Mark two framework, emphasizing scenario-based analysis.*
13:15 *🔄 Forecasting and Policy Analysis System (FPAS) provides a systematic approach to monetary policy by addressing key questions: the current state of the economy, future economic factors, and the central bank's role in maintaining stability.*
15:43 *🧠 The central bank's decision-making process involves human interpretation of model outputs, focusing on narratives consistent with economic facts and theories rather than blindly following model recommendations.*
17:17 *🔍 Central banks play a critical role in stabilizing economies by anchoring inflation expectations, which influences the decisions of economic agents, requiring clear communication of economic narratives and policy implications.*
23:47 *📊 Effective monetary policy requires not only forecasting and policy analysis systems but also consistent communication systems to convey uncertainty.*
24:49 *🗣️ The Federal Reserve's key problem in communication lies in overly focusing on a single narrative, such as "inflation is transitory," without adequately addressing uncertainty, making future adjustments challenging.*
25:53 *🤔 The Federal Reserve's "dot plots" lack transparency, providing interest rate projections without underlying narratives, potentially confusing market actors and hindering effective communication.*
27:25 *💼 Central banks' credibility is crucial for effective policy, requiring independence and structured systems to optimize decision-making and communication, especially in volatile economic scenarios like during COVID-19.*
30:54 *🇬🇧 The Bank of England's past reliance on market expectations without clear narratives led to communication challenges and undermined the effectiveness of its policy framework.*
32:55 *📉 Central banks must proactively communicate their policy rationale to build credibility and manage market expectations effectively, focusing on narrative clarity rather than just numerical projections.*
34:22 *🎯 Adopting a risk management approach in central banking is a response to past failures in communication and policy effectiveness, aiming to enhance predictability and credibility in monetary policy decision-making.*
41:27 *📈 Good policy isn't solely reliant on accurate forecasting but also requires structured decision-making processes, clear communication, and the ability to adapt to unforeseen events or shocks.*
47:31 *📉 Forecasting economic scenarios involves considering various factors, like geopolitical stability, which can significantly impact outcomes.*
48:32 *🧠 Designing a robust decision-making system in economics requires accounting for uncertainties and potential problems.*
49:38 *📊 FPAS Mark II aims to offer a framework for considering multiple scenarios in economic decision-making, exemplified by a situation involving Russia and Armenia.*
51:42 *🗣️ Economic narratives should encompass diverse scenarios, allowing for transparent communication and understanding by economic agents.*
52:15 *💡 FPAS Mark II represents a shift towards scenario-based decision-making in central banking, enhancing transparency and understanding.*
54:54 *💬 Central bank governance structures, like Armenia's, impact decision-making processes and the communication of economic forecasts.*
56:23 *📈 Economic scenarios can range from low inflation and high growth to potential overheating, highlighting the importance of scenario-based analysis.*
58:50 *🛑 Central banks must navigate between policy errors, such as being too cautious or not cautious enough, in uncertain economic environments.*
01:00:16 *🤝 Scenario-based decision-making in central banking mirrors how individuals, like small business owners, make decisions in uncertain situations.*
01:04:44 *🚗 Analogies like driving a car illustrate the necessity of considering various scenarios and potential risks in decision-making processes.*
01:09:11 *💼 Small countries, like Armenia, are acutely aware of the importance of credibility in economic governance due to past experiences with hyperinflation and economic shocks.*
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Very very interesting, thanks.
I think it's time to start asking the question: Is traditional monetary policy, specifically interest rate policy, losing traction or even working "backwards"? We all know that public debt and deficits are high and it seems realistic to expect that they will continue to rise. In this situation, more rate hikes mean more "new money" being paid as interest on the debt. At a certain point, won't the stimulatory effect of that interest income outweigh the contractionary effect on private bank lending? It seems there has long been a great amount of deference given to monetary policy to control inflation, but is that really the right policy attitude? Is it perhaps time to focus more on the role of fiscal policy in controlling inflation, rather than expecting the central bank to do it? At least in the US, the central bank seems to have difficulty getting it right in both directions - a decade of very expansive "money printing" through QE was barely successful in raising inflation to the target rate, and when inflation finally spiked, the central bank seemed unable to control it, a fact policymakers seemed fairly explicit about. Is there any chance of a video examining these dynamics closely? I'd like to hear more about the (apparently) declining "neutral rate", u*, the accuracy of various kinds of forecasting, and other variables relevant to monetary policy. Thanks Joeri!
Interest rates and inflation, are just a function of quarterly profits now, so that the economy and gdp growth look positive, whilst everything in real terms stagnates or worse. The entire economy consists of pushing dirt in circles and working for nothing. Without a better goal in mind beyond gdp growth and inflated profits, the entire edifice will continue to be pointless. Like empty luxury homes, depreciating EVs, and product cartels fixing supply.
Good video with lots of necessary and nuanced conversation, as always. But I must say I find the comments of these guys frustratingly opaque. There is all this talk about "credibility" and having a consistent approach. At the same time they talk about managing expectations and the psychology around that. One of the guys talks about competing "narratives" in the US, i.e. tranistory vs permanent inflation, and argues that the Fed was wrong to view inflation as transitory. But why? It seems to me that it WAS relatively transitory. It WAS mostly due to supply side issues and govt spending, both of which moderated somewhat. Jerome Powell explicitly said early on that he didn't think interest rate policy could impact the causes of inflation, pointing to things like supply issues in the auto market - I know Joeri knows about this because he has talked about it at length in other videos. I don't see similarly convincing arguments for why interest rates are now higher. Seemingly a big part of the current inflationary story is the lack of housing supply, and housing is supposed to be one of the most responsive sectors to interest rate policy. But how is hiking rates supposed to result in MORE housing?
I get that central bankers want to convince the market that they can control inflation - "inflation expectation" policy as it is often called. But that only works if the central bank ACTUALLY DOES have a consistent and effective method of controlling inflation. And it's not clear to me that they do. They didn't predict inflation, and I don't see very good evidence that they controlled it, beyond some weak correlation between interest rates and inflation. These guys make the point that it is not as simple and mechanistic as increasing interest rates when inflation is high and lowering them when it is low, and I agree. But that certainly seems to be the logic behind current rate hikes, which is of course the opposite of consistent and credible. There are a lot of things going into inflation, but the central bank only really has its policy rate as a tool, no matter how much they talk about anchoring inflation expectations. I think the recent period should put to rest the idea that you can control inflation simply by trying to curb expectations. If that was true, inflation would not have happened.
interesting
I can solve Armenia's employment problem. I've been through worse
🇿🇦🇿🇼
Mmm Armenia, I follow geopolitics closely. Hopefully now that Azerbaijan has taken Amorno Karabakh, they can both find some sort of peace deal and really build up the economy. Tough world out there
Hello! Why do you call an increase in money supply as "money printing". Shouldn't this term be used for debt provided to the government by the central bank?
The term doesn't exist try buying anything over 10k with "printed money" or to leave the country
Any process that creates units of currency that did not previously exist is commonly refered to as 'money printing' (or 'printing money') by non-experts (such as most of the audience)... at least when it's under unusual circumstances or someone's trying to make it out to be a problem. Largely because attempting to get out of a financial hole by debasing the currency via various methods is a government practice that is old enough that many of the most prominent examples involved Litterally printing more bank notes.
Mind you, I'd argue that if your central bank is Lending money to your government you've got other problems, though (such as the implication that the central bank is NOT part of the government itself, in much the same way you have problems if your Judiciary (and especially the highest court that a case can escalate to) is somehow not part of the government.)
I guess there is no proper definition to 'money printing'. Commentators use the term as and when it suits them.
My understanding:
1. Government's deficit spending ( or net spending) causes increase in money supply and is (can be) called money printing.
2. Private banks issuing loans creates new money . But this is not called as 'money printing'
3. Government absorbing bad or non-performing loans by doing balance-book operations. This doesn't create any new money - but this is wrongly called as 'money printing' :-)
Good question! I don't like the term these days. Yet, I used it. Why? Well, back in those days (90s Armenia), if the central bank increased the 'base money' supply that for a large part was cash. Money that could be used by regular folks, in contrast to reserves. So, in that case I think the term money printing makes sense.
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65th view!
America.printing new.dollars.old.one.in.debt..new .ones.is.debt.free.😂😂😂❤❤❤❤❤
The big lockdown inflation spike; this lockdown featured the mass quarantining of the healthy along with some of the sick. Mass locking down of the healthy. Incarceration you might identify it as.
... you might want to look into the history of what quarantine is, how it works, why it works, and what the Alternatives are (or, in most cases, Aren't).
Maybe just be grateful that modern infrastructure and understanding means we don't have to resort to the traditional following steps of Setting The Houses (or entire cities) On Fire With The People In Them to get plagues under control.
Because a pandemic is just a plague with access to modern transportation.
It was largely voluntary outside of China. Are you Chinese?
So uplifting!