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BRIDGETOWN, Barbados, CMC – Caribbean economists were meeting here on Tuesday amid a call for them to re-think the measures and practices used in the past to provide guidance to police makers in the region.
Governor of the Barbados Central Bank, Dr. DeLisle Worrell told the 43rd Annual Monetary Studies Conference (AMSC) that the failure to be sufficiently specific may explain why economists and other monetary officials “offer so little practical guidance to policy makers”
He said central bankers had to make decisions on issue such as how to assess regional financial stability in the Caribbean and what financial soundness indicators (FSIs) are appropriate and useful for this integrated financial region.
“What early [COLOR=blue !important][COLOR=blue !important]warning [COLOR=blue !important]systems[/COLOR][/COLOR][/COLOR] do we need for a region where cross border risks have been the most troublesome in recent times,” he asked the delegates, noting the market behaviour of Caribbean exchange rates in an era of consolidated treasury management is proving somewhat of a conundrum.
“The changing cash management strategies of conglomerate firms, foreign investors and multinational banks are resulting in fundamental changes to the way our foreign exchange markets work. We need research into these markets”
He said there was also need for alternative approaches to interest rate determination and more realistic models of interest rate effects.
“We have tested the interest sensitivity of loans every which way, and one thing is clear: small changes, of the orders of magnitude common in industrial countries, have little effect.
“We need better indicators of fiscal sustainability on the open economy. We keep talking about debt sustainability when we should be discussing fiscal sustainability. And we need to distinguish the problematic from the unsustainable, if our advice is to be taken seriously.
“We need to test the limits to countercyclical policy in small open economies. The models we borrow from less open economies fail to take account of the early onset of the foreign exchange constraint in our economies,” Worrell said.
The Barbados Central Bank Governor said AMSC, while it is now well established and is the leading conference of Caribbean economists and those working in the region, it should now be challenged to push to the next level.
He said there were two aspects of the challenge facing Caribbean economists that he would like to see the conference deal with, including the need for new ways of conceptualising regional economies, and the need to do research that points the way more clearly for policy makers and the public.
Worrell said the need for the new concepts were important since the conventional analysis gives counter intuitive answers to many of the questions that are of ongoing interest.
“Conventional economics says that flexible exchange rates are better, but the countries with fixed exchange rates are more prosperous,” he said, noting that conventional economics teaches that it is good policy for the Central Bank to speak out publicly against bad fiscal policy, but in truth public disagreement destroys the credibility of both parties.
“Conventional economics recommends that to reduce inflation you should raise interest rates, even though higher interest drives up costs; Conventional economics suggests that stock exchanges are a good way to [COLOR=blue !important][COLOR=blue !important]fund [COLOR=blue !important]investment[/COLOR][/COLOR][/COLOR], even though new issues to fund capital formation have become a rarity.”
Worrell said that research in the region ‘looks pretty much like any other” noting that “we used to argue that Caribbean circumstances were different, that small open economies (SOEs) were different, and that resource rich and resource poor countries were different.
“Nowadays we use the same models, the same specifications, similar data and the same tests. If you use these methods and you get the same result for Barbados, with an economy the size of a small county in an obscure US state, as you get for the entire US, shouldn't you be sceptical?
“The truth is that economies are so diverse in so many ways that the notion of universal theory is problematic. The simplifications which are the essence of modelling will make sense only if they mirror the essential features of each economy. We need to build models that capture the essence of our economies, and that surely cannot be a mirror of the US.”
The Central bank Governor said that it was also important for the conference to take note of the changing technological environment noting that because of technological change, and the changes in societies that have resulted, the world of today is very different from societies of even 30 years ago.
editorial@gleanerjm.com
Governor of the Barbados Central Bank, Dr. DeLisle Worrell told the 43rd Annual Monetary Studies Conference (AMSC) that the failure to be sufficiently specific may explain why economists and other monetary officials “offer so little practical guidance to policy makers”
He said central bankers had to make decisions on issue such as how to assess regional financial stability in the Caribbean and what financial soundness indicators (FSIs) are appropriate and useful for this integrated financial region.
“What early [COLOR=blue !important][COLOR=blue !important]warning [COLOR=blue !important]systems[/COLOR][/COLOR][/COLOR] do we need for a region where cross border risks have been the most troublesome in recent times,” he asked the delegates, noting the market behaviour of Caribbean exchange rates in an era of consolidated treasury management is proving somewhat of a conundrum.
“The changing cash management strategies of conglomerate firms, foreign investors and multinational banks are resulting in fundamental changes to the way our foreign exchange markets work. We need research into these markets”
He said there was also need for alternative approaches to interest rate determination and more realistic models of interest rate effects.
“We have tested the interest sensitivity of loans every which way, and one thing is clear: small changes, of the orders of magnitude common in industrial countries, have little effect.
“We need better indicators of fiscal sustainability on the open economy. We keep talking about debt sustainability when we should be discussing fiscal sustainability. And we need to distinguish the problematic from the unsustainable, if our advice is to be taken seriously.
“We need to test the limits to countercyclical policy in small open economies. The models we borrow from less open economies fail to take account of the early onset of the foreign exchange constraint in our economies,” Worrell said.
The Barbados Central Bank Governor said AMSC, while it is now well established and is the leading conference of Caribbean economists and those working in the region, it should now be challenged to push to the next level.
He said there were two aspects of the challenge facing Caribbean economists that he would like to see the conference deal with, including the need for new ways of conceptualising regional economies, and the need to do research that points the way more clearly for policy makers and the public.
Worrell said the need for the new concepts were important since the conventional analysis gives counter intuitive answers to many of the questions that are of ongoing interest.
“Conventional economics says that flexible exchange rates are better, but the countries with fixed exchange rates are more prosperous,” he said, noting that conventional economics teaches that it is good policy for the Central Bank to speak out publicly against bad fiscal policy, but in truth public disagreement destroys the credibility of both parties.
“Conventional economics recommends that to reduce inflation you should raise interest rates, even though higher interest drives up costs; Conventional economics suggests that stock exchanges are a good way to [COLOR=blue !important][COLOR=blue !important]fund [COLOR=blue !important]investment[/COLOR][/COLOR][/COLOR], even though new issues to fund capital formation have become a rarity.”
Worrell said that research in the region ‘looks pretty much like any other” noting that “we used to argue that Caribbean circumstances were different, that small open economies (SOEs) were different, and that resource rich and resource poor countries were different.
“Nowadays we use the same models, the same specifications, similar data and the same tests. If you use these methods and you get the same result for Barbados, with an economy the size of a small county in an obscure US state, as you get for the entire US, shouldn't you be sceptical?
“The truth is that economies are so diverse in so many ways that the notion of universal theory is problematic. The simplifications which are the essence of modelling will make sense only if they mirror the essential features of each economy. We need to build models that capture the essence of our economies, and that surely cannot be a mirror of the US.”
The Central bank Governor said that it was also important for the conference to take note of the changing technological environment noting that because of technological change, and the changes in societies that have resulted, the world of today is very different from societies of even 30 years ago.
editorial@gleanerjm.com
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