Role of BOJ in new economy
This is a contribution from the Bank of Jamaica.
The Bank of Jamaica (BOJ) has an important role in supporting the country's economic growth objective. One of its mandates is to formulate and implement monetary policy to ensure price stability, consistent with the "fullest expansion in production, trade and employment." The bank also has the responsibility of ensuring a stable financial system, which includes financial intermediaries, as well as the payment and settlement systems.
Price stability is a necessary condition for sustained economic growth. Low and predictable price changes contribute to better economic decision making and planning. With low inflation and inflationary expectations, domestic interest rates will also be low, which, in turn, encourages long-term investments that improve productivity, competitiveness and growth. The bank is best able to promote growth by demonstrating a credible commitment, over a long period of time, to a stable, low-inflation environment.
In designing and implementing monetary policy, the BOJ strives, daily, to balance monetary expansion with growth in the demand for money. Expansionary monetary policy strengthens the flow of spending in the economy, which, under ideal circumstances, boosts incomes, reduces unemployment and results in higher growth. However, excessive monetary expansion results in persistently higher inflation, which can induce speculative and anti-growth behaviour. Even worse, excessive monetary expansion that encourages asset price bubbles can cause a financial crisis and harm the long-term prospects of the economy.
Please see BOJ's pamphlet Essential Facts About Inflation for a more detailed discussion at link: http://boj.org.jm/uploads/pdf/papers_pamphlets/papers_pamphlets_Essentia...
Since the late 1990s, the BOJ has had significant success in lowering inflation to single-digit levels. Notwithstanding these successes, there is the need for inflation to go lower to approximate the level of Jamaica's major trading partners. Inflation at the level of Jamaica's trading partners will allow for relative stability in the exchange rate without impairing the external price competitiveness of the economy.
Looking ahead to the medium to long term, the BOJ intends to strengthen its monetary-policy framework. This framework, supported by sound fiscal policy, will have an explicit and singular commitment to low inflation as a long-term goal, thereby anchoring inflation expectations.
The bank also has responsibility for the maintenance of stability in the financial system, as well as facilitating its efficient functioning. A financial system that safely and efficiently intermediates the flow of money and credit in the economy represents an important foundation for growth. The legislative support for the supervision of deposit-taking institutions was recently strengthened by the passage of the Banking Services Act.
The BOJ will also continue to pursue initiatives that promote access to credit. One such initiative was the introduction of credit bureaus that facilitate better risk management and enable banks and other financial institutions to increase lending, including to underserved segments of the population, such as small and medium-size enterprises.
The bank also continues to monitor and modify, where appropriate, the operational framework of the payment and settlement systems with the aim of enhancing efficiencies, removing systemic risks and promoting financial inclusion.
The bank's role then is all about context - stability, predictability, integrity, oversight, infrastructure and efficiency. These sustain an environment in which business can thrive, the economy can grow, create jobs and improve living standards.
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