CRITERIOS DE INTERPRETACION DE MATERIA ORGANICA Grupos Texturales

The ultimate goals of monetary policy of the Central Bank of the Republic of China (Taiwan) (CBC), include price stability, financial stability and sustainable economic growth. Since the mid-1980s, the CBC has adopted monetary targeting. From 1992 onwards, it has been setting intermediate targets on a yearly basis. For policy formulation, the M2 monetary aggregate is the intermediate target. Every November, the Department of Economic Research suggests a target zone of M2 for the coming year based on its estimation of M2 money demand. The CBC then gathers a panel of scholars and experts to discuss the estimation results. The Board of Directors reviews the suggested annual target zone at its December meeting. The target zone set by the Board serves as a guide for monetary policy operations throughout the year.

Macroeconomic surveillance has been the foundation of monetary policy decisions. To steer its monetary policy towards the set goals, the CBC exercises its macroeconomic surveillance mainly on a quarterly basis. A wide range of economic and financial variables are analyzed to form the basis for policy decisions. The highest policy making body of the CBC is the Board of Directors. Members of the Board meet quarterly and take decisions on official rates and reserve requirements.

For macroeconomic surveillance, the Department of Economic Research is responsible for analyzing and forecasting the changes in the external and internal macroeconomic and financial situation, as well as providing policy suggestions. The Department of Banking implements monetary policy operations to influence bank reserves and short-term interest rates as well as monitor the payment systems. The Department of Foreign Exchange is responsible for the management of foreign exchange markets and capital movements.

After the establishment of the Financial Supervisory Commission in 2004, the CBC no longer shares the responsibility of bank examination. The Department of Financial Inspection has therefore shifted its main task to the assessment of financial stability. The CBC has established a committee for financial stability assessment in 2007, which meets quarterly to discuss the soundness of financial institutions and the potential factors affecting financial stability.

To take a forward-looking perspective on the domestic and international economic development, the CBC analyzes and forecasts economic growth and inflation on a quarterly basis. It uses econometric models and time series analysis for economic forecasting, and also conducts a quarterly business survey on 30 large corporations via visitations and discussions with their executives. The information gathered from the survey is used to ascertain whether it is necessary to revise its economic forecast.

As price stability is a major goal, the CBC began to forecast inflation on a monthly basis since 2004, utilizing a component approach with leading indicators and econometric models. On the monetary front, the CBC monitors and forecasts monetary aggregates every month while also monitoring bank credit expansion, capital flows and other financial indicators ranging from exchange rates to asset prices. The Taylor’s Rule and the monetary condition index (MCI) are also used on a monthly basis to help assess whether monetary policy action is required. In order to strengthen the capacity of detecting vulnerabilities and risks in the early stages of crisis development, the CBC has employed an early warning system for financial crises consisting of a set of macro prudential indicators and econometric models to forecast the likelihood of financial crises.

The macro prudential indicators include aggregated microprudential and macroeconomic indicators. The former are basically derived from the IMF financial soundness indicators, together with market-based information, such as

stock prices and credit ratings for financial institutions. The latter indicators include the ones related to external sustainability, financial conditions, fiscal positions, robustness of the real sector, and global economic conditions. These indicators are reviewed on a quarterly basis.

Figure 3.13: Movement of Key Economic Variables in ROC (Taiwan)

3.13a. Economic Growth and Price Level 3.13b. Broad Money and Credit Growth

3.13c. Change in Exchange Rates 3.13d. Interest Rates

To estimate the likelihood of financial crises, the CBC has developed ordered probit models. In addition, it has adopted thresholds for the credit and asset price gaps to assess the risk of asset price bubbles and these are conducted as and when necessary.

To enhance surveillance over the foreign exchange market, the CBC monitors foreign exchange transactions on a daily basis through the Foreign Exchange Declaration System and the Reporting System of Foreign Exchange Transactions. It also sets regulations on foreign exchange derivatives to reduce excessive speculative trading in the market.

3.1.13 Thailand

The analytical framework to monitor monetary and financial stability at the Bank of Thailand (BOT) is based on macroeconomic surveillance complemented by macro-financial linkage analysis. The main goal is to assess possible exposures that may allow shocks to be transmitted to the overall economy through the financial system and review the ability of the financial system to withstand those potential shocks. In addition, the framework’s aim is to serve the surveillance process under international forums such as ASEAN+3 Finance Ministers’ Meetings and the Monetary and Financial Stability Committee initiated by the EMEAP.

The macroeconomic assessment of the stability monitoring framework is performed through an integrated risk assessment approach that enables an identification of possible risks and vulnerabilities which can lead to financial instability. The task is undertaken by the Macro Surveillance Team under the Monetary Policy Group. The surveillance process builds on contributions from other departments which include the Financial Institutions Policy Group, Financial Market Operations Group, Data Management Group, and Domestic Economy Department.

The macroeconomic surveillance framework involves the analysis and assessment, both quantitatively and qualitatively, of the various sectors of the economy such as the external sector, fiscal sector, real estate, financial institutions, financial markets, corporate sector, and household sector.

After the Asian Financial Crisis in 1997, the monitoring process of the external sector has extended from the plain current account and capital flow

movements monitoring to a more comprehensive monitoring that also covers the country’s foreign currency debt exposures and its ability to service external debts. The composition of flows as well as adequacy of international reserves has received more attention. In this light, the key indicators derived from both stock and flow variables are compared against international standards as well as Thailand’s “pre-crisis” levels.

Figure 3.14: Movement of Key Economic Variables in Thailand

3.14a. Economic Growth and Price Level 3.14b. Broad Money and Credit Growth

3.14c. Change in Exchange Rates 3.14d. Interest Rates

In the fiscal sector, fiscal discipline has been well-maintained, partly due to the legal limits to safeguard the country’s fiscal sustainability implemented over the past several years. The real estate sector has been another important area of focus after the 1997 crisis. The assessment concentrates on emerging signs of a bubble both in terms of real estate prices and activities.

The Financial Institutions Policy Group (FIPG) carries out an extensive surveillance process to oversee financial institutions at the micro level. The macro surveillance process attempts to complement the work of FIPG from a macro- prudential standpoint such as monitoring possible economic threats to financial institutions as well as possible shocks to the economy through financial institutions. Due to the short-term nature of shocks and market behaviours in the financial markets, the Financial Market Operations Group (FMOG) closely monitors market movements and regularly reports the developments to the Bank of Thailand’s top executives. The macro surveillance framework, therefore, aims to complement the FMOG’s short-term surveillance process by providing longer-run financial stability and an analysis of the financial impact on the overall economy of equity, bond and foreign exchange market movements.

The banking system’s credits are primarily allocated to the corporate sector. As a result, a healthy performance of the corporate sector, judged not only from firm’s financial status but also their ability to absorb shocks, should bring about a greater contribution to the soundness of financial institutions as well as the overall financial system.

The household sector is closely linked to financial institutions through both their deposits with and credits drawn from financial institutions. The household sector’s balance sheet and borrowing behaviour thus have an implication on banks’ balance sheet and overall financial stability.

3.1.14 Vietnam

The Law on the State Bank of Vietnam (SBV) states: “The national monetary policy is a component of the economic-financial policies of the State, aimed at stabilizing the value of the currency, controlling inflation, facilitating the socio-economic development, ensuring the national defence, security and improving the living standards of the people.”

According to the Article 3 (item 1) of the Law, the National Assembly decides on and supervises the implementation of the national monetary policy and estimated annual inflation rates in a correlation with the state budget and economic growth rates.

The government prepares the plan for national monetary policy and the estimated annual inflation rate and submits these to the National Assembly for its decision. The implementation of the national monetary policy and decision making on the amount of additional money to be injected to annual circulations are made by the Government. The Government submits periodic reports of these activities to the Standing Committee of the National Assembly and also decides on other specific policies and relevant solutions.

Figure 3.15: Movement of Key Economic Variables in Vietnam

3.15a. Economic Growth and Price Level 3.15b. Broad Money and Credit Growth

3.14c. Change in Exchange Rates 3.14d. Interest Rates

The Advisory Board for the national monetary policy advises the Government in decision making on matters under the duties and powers of the Government with respect to monetary policy. The Advisory Board for national monetary policy comprises a Chairman who is one of the Deputy Prime Ministers, a standing member who is Governor of the State Bank of Vietnam, and other members of the Ministry Of Finance, the Ministry Of Planning and Investment, other relevant ministries, bodies and banking experts.

As stated in the Law on the State Bank of Vietnam, the SBV develops a plan for national monetary policy which is submitted to the Government for consideration before presenting to the National Assembly for decision. In light of this, monetary policy in Vietnam is, therefore, not independently managed by the central bank. In the formulation of monetary policy and its implementation plans, the SBV monitors available economic as well as financial indicators to form the basis for its policy and plans.

3.2 Concluding Remarks

The macroeconomic surveillance system in the SEACEN region has evolved at a varied pace. Based on their current macroeconomic surveillance frameworks and practices, the SEACEN countries can be divided roughly into two groups. Among the 14 countries covered in this study, half or seven countries come under the first group, which include: (i) Singapore, (ii) Korea, (iii) ROC (Taiwan), (iv) Thailand, (v) Malaysia, (vi) Philippines, and (vii) Indonesia. In order to monitor risks and vulnerabilities in the domestic as well as in the international markets, these countries have developed and improved their macroeconomic surveillance mechanisms. However, the surveillance mechanisms of these countries failed to identify the vulnerabilities which occurred in the market resulting in the 1997 financial crisis. In the aftermath, many of the crisis hit countries have put a lot of effort in developing a competent macroeconomic surveillance system to prevent similar crises from occurring.

The countries that fall under the second group include: (i) Fiji, (ii) Sri Lanka, (iii) Vietnam, (iv) Cambodia, (v) Papua New Guinea, (vi) Nepal, and (vii) Myanmar. These countries are still depending on less developed macroeconomic surveillance systems. Since these economies are being gradually integrated into the global economic system following global trends, they will see not only new

opportunities but also increasing risks and vulnerabilities in coming days. In order to be able to exploit the opportunities and to deal effectively with the risks and vulnerabilities that globalization and integration bring with them, these countries need to improve their macroeconomic surveillance systems. In this regard, this group of countries can learn significantly from the experience of the first group countries as mentioned above.

Chapter Four

EFFECTIVENESS OF MACROECONOMIC SURVEILLANCE IN