How might this work in practice? Member countries would each provide a systematic description of their chosen policy frameworks in key areas - relating to monetary, fiscal, financial, and exchange rate policies. For these purposes, a policy framework is just a more or less formal description of a country’s policy objectives and the policy instruments that have been assigned to meet them, including any policy rules, targets or strategies that may be used as a guide to decision-taking. This approach would exploit the Fund’s already significant access to information about members’ policy frameworks, and if necessary its power to request more. And it would also avoid prescription and explicitly recognise members’ undoubted right to choose their own policy frameworks, providing that they are consistent with their commitments under the Articles. Given this starting point, Fund surveillance could then focus on two key sets of issues. First, is an individual country’s set of monetary, fiscal, financial, and exchange rate frameworks internally consistent? The key questions would be: is this a sustainable approach to policy? And is policy being implemented in a way which is consistent with the stated framework? Taken together are the policy frameworks adopted by a member consistent with its obligations under the Fund’s Articles, including the member’s overarching commitment to collaborate with the Fund and other members to assure external stability? The Asian crisis of the late 1990s illustrates the problems that can develop from internally inconsistent financial and exchange rate policies.
Should such a scenario materialize, a policy mix of low policy rate and high reserve requirement ratios may be implemented for a long period, both to balance domestic and foreign demand and for macroprudential purposes. If global economic problems further aggravate and domestic economic activity assumes a stagnation trend, we may have to utilize all policy instruments with their effect being on the easing side. Although downside risks persist, there are also upside risks regarding global economy, particularly driven by the lagged impacts of the exceptionally loose policies implemented by the advanced economies over the past two years. If the global economy assumes a faster-than-expected recovery, global inflationary pressures may occur and thus trigger a tightening in the monetary policies of advanced economies. The materialization of such a scenario would mean higher global interest rates and domestic demand-driven inflationary pressures, and thus necessitate increasing both policy rates and reserve requirements. Oil and other commodity prices have displayed rapid increases in the recent period. If the rise in commodity prices persists, this may have implications on the general pricing behavior given the strong pace of domestic demand. Should such a risk materialize in the upcoming period and hamper the attainment of medium-term inflation targets, there may be stronger tightening than was envisaged in the baseline scenario. However, the policy mix may vary depending on the developments regarding foreign demand, capital flows, and the outlook for credit growth. We will continue to closely monitor fiscal policy developments while formulating our monetary policy.