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Hites Ahir, Hendre Garbers, Mattia Coppo, Mr. Giovanni Melina, Mr. Futoshi Narita, Ms. Filiz D Unsal, Vivian Malta, Xin Tang, Daniel Gurara, Luis-Felipe Zanna, Linda G. Venable, Mr. Kangni R Kpodar, and Mr. Chris Papageorgiou
Despite strong economic growth since 2000, many low-income countries (LICs) still face numerous macroeconomic challenges, even prior to the COVID-19 pandemic. Despite the deceleration in real GDP growth during the 2008 global financial crisis, LICs on average saw 4.5 percent of real GDP growth during 2000 to 2014, making progress in economic convergence toward higher-income countries. However, the commodity price collapse in 2014–15 hit many commodity-exporting LICs and highlighted their vulnerabilities due to the limited extent of economic diversification. Furthermore, LICs are currently facing a crisis like no other—COVID-19, which requires careful policymaking to save lives and livelihoods in LICs, informed by policy debate and thoughtful research tailored to the COVID-19 situation. There are also other challenges beyond COVID-19, such as climate change, high levels of public debt burdens, and persistent structural issues.
Mr. Jan Vlcek, Mikhail Pranovich, Patrick Hitayezu, Bruno Mwenese, and Christian Nyalihama
National Bank of Rwanda (BNR) modernized monetary policy and transited to the price-based policy framework in January 2019. The Forecasting and Policy Analysis System (FPAS) is the cornerstone for the new forward-looking framework, which mobilizes and organizes resources and sets processes for regular forecasting rounds. The core of this system is a structural macroeconomic model for macroeconomic analysis and projections to support the BNR staff’s policy recommendations to the monetary policy committee. This paper documents the quarterly projection model (QPM) at the core of the FPAS at the BNR. The model is an extension of the canonical structure in Berg et al (2006) to reflect specifics of the interest-rate-based policy framework with a managed exchange rate, the effect of agricultural sector and harvests on prices, and the role of fiscal policies and aid flows.
International Monetary Fund. African Dept.
This paper highlights Rwanda’s Request for Disbursement Under the Rapid Credit Facility (RCF). The economic impact of the coronavirus disease 2019 pandemic is rapidly unfolding with the near-term outlook deteriorating quickly. This has given a rise to significant fiscal and external financing needs. The authorities have acted fast by putting in place measures to help contain and mitigate the spread of the disease. The RCF funds will support the authorities’ efforts by backstopping the decline in international reserves and providing financing to the budget for increased spending aimed at containing the epidemic and mitigating its economic impact. This additional IMF financing also ought to help catalyze further assistance from the international community, preferably in the form of grants. The IMF continues to monitor Rwanda’s situation closely and stands ready to provide policy advice and further support as needed. Monetary policy needs to be data-driven and the central bank should stand ready to provide additional liquidity support if warranted. A flexible exchange rate should be maintained as a shock absorber. The National Bank of Rwanda has taken various measures to help maintain the health of the financial sector and should continue to show flexibility, while encouraging prudent loan restructuring and stepping up reporting requirements.
Mr. Ales Bulir and Mr. Jan Vlcek
Does monetary policy react systematically to macroeconomic innovations? In a sample of 16 countries – operating under various monetary regimes – we find that monetary policy decisions, as expressed in yield curve movements, do react to macroeconomic innovations and these reactions reflect the monetary policy regime. While we find evidence of the primacy of the price stability objective in the inflation targeting countries, links to inflation and the output gap are generally weaker and less systematic in money-targeting and multiple-objective countries.
International Monetary Fund. African Dept.
This is the tenth and final review of Rwanda’s PSI-program, approved by the Executive Board on December 2, 2013. A concurrent 18-month SCF arrangement was approved on June 8, 2016 to support adjustment policies to eliminate external imbalances. The PSI-supported program was extended three times, on: June 8, 2016; November 19, 2017; and January 12, 2018. When it expires on December 1, 2018, the program will have reached its maximum 5-year limit. Recent Developments. After a dip in 2016–17, real GDP growth has been recovering over the past four quarters. Growth averaged 8.6 percent in the first half of 2018 and, despite a temporary deceleration in Q2, remains in line with projections for 7.2 percent for the year. Growth in the medium term should remain at or higher than historical averages, based on a strong pipeline of tourism and business tourism, new mining operations, more resilient agriculture, new and more diversified exports, and construction of a new airport. Inflation remains low, and expectations within targeted ranges. External balances and reserve buffers continued to improve, while the financial sector remains healthy.
International Monetary Fund. African Dept.
This paper discusses Rwanda’s First Review of the Standby Credit Facility (SCF) Arrangement and Sixth Review Under the Policy Support Instrument (PSI), Request for Waiver and Modification of Performance and Assessment Criteria. Performance under the PSI and SCF-supported programs remains on track. Nearly all quantitative program targets and structural benchmarks were respected: two quantitative targets were missed by minor amounts, and one benchmark was delayed. The IMF staff recommends approval of the first review of the SCF arrangement and the sixth review of the program supported by the PCI, as well as the request for waiver of nonobservance of the continuous external arrears criterion, and modification of forthcoming program criteria.
Mr. Olivier D Jeanne and Mr. Damiano Sandri
Financially closed economies insure themselves against current-account shocks using international reserves. We characterize the optimal management of reserves using an open-economy model of precautionary savings and emphasize several results. First, the welfare-based opportunity cost of reserves differs from the measures often used by practitioners. Second, under plausible calibrations the model is consistent with the rule of thumb that reserves should be close to three months of imports. Third, simple linear rules can capture most of the welfare gains from optimal reserve management. Fourth, policymakers should place more emphasis on how to use reserves in response to shocks than on the reserve target itself.
International Monetary Fund. African Dept.
This paper discusses Rwanda’s Third Review Under the Policy Support Instrument (PSI). Rwanda’s performance under the PSI has been satisfactory. The authorities are to be commended for meeting all quantitative assessment criteria. The performance on indicative targets and structural benchmarks was uneven, and it will be important to maintain the momentum of reforms, including on revenue mobilization while strengthening project implementation. Growth in 2015 is expected to remain strong, while the outlook is stable. The cautious fiscal stance and monetary policy are consistent with the need to preserve policy buffers.