Introduction and Conclusions Macropolicy and Inflation Steven Barnett

Introduction and Conclusions Macro-policy and Inflation Steven Barnett (May 2010)

Main Points 1. Inflation should be BOM’s main objective 2. Inflation outlook is worrisome 3. Monetary policy tightening should continue 4. Fiscal policy should not add to demand – Keep spending at original 2010 budget – 2011 budget same GDP share as 2010

Inflation as Primary Objective • Monetary policy goal: Low & stable inflation – Global trend toward inflation targeting (IT) – Best economic outcomes – Central bank independence • Inflation is costly – Hurts the poor – Bad for growth • Reduces investment and slows economic development – Macro-instability higher foreign borrowing cost

Inflation outlook is worrisome

Tightening Cycle has Started • More monetary tightening needed – Price pressures reflect excess demand – Risk of upward wage-price spiral • Tightening means – Higher interest rates – Togrog appreciation

Monetary policy has been loosened considerably…

Fiscal Policy • Higher spending will increase inflation – 30% wage increase 6 percentage points extra inflation • Macro-policy mix is awful – Fiscal loosening does not help economy • Higher inflation • More imports • Currency appreciation – Monetary policy must tighten more • Works by squeezing private sector • Limits to how much monetary policy can offset loose fiscal

Fiscal Messages Stick to the original 2010 budget - This means no increase in spending 2011: NO increase in spending (% GDP) - This means MTFF should be revised