PARAGUAY
Inflation Targeting Regime: Challenges during the transition
Carlos G. Fernรกndez Valdovinos Central Bank of Paraguay September, 2014
A long road before implementation Since 1995, with the adoption of the new CB Charter Law, the main instrument was the control of monetary aggregates, especially M0 (bills and coins) In 2003, an IMF Stand-by agreement was signed. This step was crucial to build stronger macro-foundations. Since 2004, the CBP started to outline strategies in order to adopt an Inflation Target regime in the future. TA from peers (Mexico, Chile, Peru, Brazil, Colombia and the UK) and the IMF prepared the ground for full implementation. Several factors (better macroeconomic framework, financial deepening, technological advances) weakened the relation between M0 and inflation
Still, during interim years, the control of monetary aggregates continue to served as an intermediate goal. Finally, on May 18 2011, the CBP Board of Directors formally announced the implementation of an IT regimen.
Why inflation targeting? 50%
35%
Mo Aggregate
Mo Aggregate
40% 30% 25% 20% 15% R² = 0,8678
10% 5% 0% 0%
10%
20% Inflation
30%
1990-1999
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
1981-1989
45%
R² = 0,566
0%
40%
10%
20% Inflation
2000-2014 35% 30%
Mo Aggregate
25% 20% 15% 10% R² = 0,0233
5% 0% -5%
Source: Central Bank of Paraguay
0%
5%
10% Inflation
15%
20%
30%
40%
50%
00%
Source: Central Bank of Paraguay, FM 2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
10%
2003
15%
2002
20%
2001
External Debt/GDP
2000
1000
1999
35%
1998
2000
1997
40%
1996
25%
USDmillions
30%
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
3%
1995
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 jun-‌
Adjusting fiscal imbalances Fiscal Def./Sur.
2%
1%
0%
-1%
-2%
-3%
-4%
-5%
Net creditor position
0
-1000
-2000
05% -3000
-4000
A continuous process of “dedolarization�
75 70 65 60 55 50 45 40 35 30
mar-03 sep-03 mar-04 sep-04 mar-05 sep-05 mar-06 sep-06 mar-07 sep-07 mar-08 sep-08 mar-09 sep-09 mar-10 sep-10 mar-11 sep-11 mar-12 sep-12 mar-13 sep-13 mar-14
% Annual Inflation Variation
Reducing dollarization levels
Credit Dolarization
Deposit Dolarization
Pass-through 1994-2003 (months)
0,60
Pass-through 2004-2014 (months)
0,60
0,40
0,40
0,30
0,30
%
0,50
%
0,50
0,20
0,20
0,10
0,10
0,00
0,00
1
2
3
4
5
6
-0,10
Source: Central Bank of Paraguay, WEO
7
8
9
10
1 -0,10
2
3
4
5
6
7
8
9
10
Deposits/GDP Credit/GDP
dic-13
dic-12
dic-11
dic-10
dic-09
dic-08
dic-07
dic-06
dic-05
dic-04
dic-03
dic-02
dic-01
dic-00
dic-99
dic-98
dic-97
dic-96
dic-95
dic-94
Increasing financial deepening
50%
44%
40%
30%
37%
20%
10%
0%
Improving MP effectiveness
Capitalization
• Strengthen the CBP balance sheet. • CBP independence.
Communication
• Raising public awareness. • Credibility. • Expectations.
A successful story of IT implementation
Monetary Aggregates
Inflation Targeting (Experimental Stage)
Inflation Targeting
25
20
%
15
10
5
Core Inflation
Total
Floor
Ceiling
jul-14
jul-13
jul-12
jul-11
jul-10
jul-09
jul-08
jul-07
jul-06
jul-05
jul-04
jul-03
jul-02
jul-01
jul-00
jul-99
jul-98
jul-97
jul-96
0
Summary Paraguay had been laying the ground for the implementation of an IT regime for almost a decade. Strong macroeconomic foundations and crucial structural reforms were key elements for the implementation of the new system in May 2011. Results have been encouraging since then: inflation level and volatility have been significantly reduced and expectations have been anchored. The CBP continues to strengthen the regime: improving communication, enhancing forecast models. T.A. from IMF and regional peers continue to be fundamental. In sum, Paraguay is an example that IT can be very successful in a small, open, emerging economy.
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