Sayuri Shirai: Recent monetary policy trends in advanced economies
and the Asia-Pacific region
Keynote address by Ms Sayuri Shirai, Member of the Policy Board of the Bank of Japan, to
the National asset liability management conference, Singapore, 23 July 2014.
* * *
I. Introduction
It is a great honor to visit Singapore and have the opportunity to give a keynote address at
the National Asset-Liability Management conference. I have been a Bank of Japan (BOJ)
Policy Board member since 2011, and am responsible for making decisions on monetary
policy conduct with Governor Haruhiko Kuroda and other Policy Board members. Today, I
would like to talk about the recent monetary policy trends in advanced economies and the
Asia-Pacific region. In early January this year, I had the opportunity of giving a speech in
Singapore on recent monetary policy developments in advanced economies and their
relationship with emerging economies. Immediately after that, I was pleasantly surprised
when Central Banking Publications, the organizer of today's conference, kindly asked me to
extend this line of thinking in the context of the Asia-Pacific region and give a speech today.
While it is a challenging task to review the developments in this diverse region, I hope that
my speech will provide a useful background to foster active discussions during this
conference.
I will begin with an overview of recent monetary policy in advanced economies (covering the
United States, the euro area, Japan, and the United Kingdom). I will then focus on the
AsiaPacific region by summarizing the features of monetary policy conduct and its related
challenges over the past decade - covering nine economies (Australia, China, Indonesia,
Malaysia, New Zealand, the Philippines, Singapore, South Korea, and Thailand). Finally, I
will present my views on the region's inflation performance and the direction of future
monetary policy conduct.
II. Recent monetary policy conduct features in advanced economies
Since the outset of the global financial crisis, monetary policy conduct has changed
dramatically in advanced economies. Let me highlight four features commonly observed
among such economies: (1) adoption of a 2 percent inflation target; (2) stabilizing inflation
expectations at around 2 percent; (3) unconventional monetary policy under the zero interest
rate lower bound; and (4) an emphasis on financial stability and its relation to monetary and
macroprudential policies. I will explain these features by discussing four central banks: the
U.S. Federal Reserve, the European Central Bank (ECB), the BOJ, and the Bank of England
(BOE), as shown in Chart 1.
A. Adoption of a 2 percent inflation target
First, all four central banks have adopted a medium-term inflation target or a numerical
definition of price stability with a 2 percent, or close to 2 percent, convergence: their
monetary policy mandates all include price stability. These central banks use headline
inflation as a reference to their inflation targets (the Harmonised Index of Consumer Prices
[HICP] for the ECB; the consumer price index [CPI] for the BOJ and the BOE; and the price
index for personal consumption expenditures [PCE] for the Federal Reserve). The Federal
Reserve, the ECB, and the BOJ also officially use the core PCE deflator, the core HICP, and
the core CPI, respectively, as operational guides to examine the underlining price
movements in monetary policy conduct.1
The BOE and the ECB were frontrunners in adopting price stability targets, and the current
numerical targets were adopted in 2003, prior to the global financial crisis, while the Federal
Reserve and the BOJ did so after the crisis in 2012 and 2013, respectively. Regardless of
whether an inflation-targeting framework is officially implemented, the practices adopted are
similar for each of the four central banks. These practices include adopting a numerical
inflation target with clear mandates, the release of medium-term forecasts on future inflation
and economic growth (generally for about three years), the presence of a committee that
independently determines monetary policy, and various accountability requirements on
achieving the target.
These central banks all make policy decisions to align their inflation forecasts with their
specific inflation target over the medium term (or medium to long term). In other words, they
conduct a so-called "flexible inflation-targeting framework" that is defined by Professor Lars
E.O. Svensson as monetary policy conduct that attempts to stabilize inflation around the
inflation target and to stabilize the output gap around the sustainable level. Namely,
monetary policy should be conducted flexibly with the aim of achieving the inflation target by
taking into account various possible disturbances and their impacts on economic growth.
This means conducting monetary policy so that a central bank's inflation forecast gradually
approaches its target in the medium term and inflation meets the target as a medium-term
average. This approach is embedded in the monetary policy framework of the Federal
Reserve because of its explicit dual mandate of price stability and maximum employment.
In recent years, the realized inflation rates in some of these economies have been below the
relevant target for some time (Chart 2). This seems to reflect declining energy prices,
excessive employment and capital stock, exchange rate appreciation, and continued
headwinds caused by the global financial crisis. Those headwinds include strengthened
financial regulations, banks' tight lending standards, the deleveraging process by firms and
households, and the moderate pace of global economic recovery. As a result, some central
banks seem to be finding it necessary to conduct monetary easing for longer periods than
originally expected.
B. Stabilizing inflation expectations at around 2 percent
To achieve price stability, a central bank needs to stabilize the public's inflation expectations
at around its price stability target. If such expectations are well anchored, there is a tendency
for inflation to converge to the target even after a deviation. In general, long-term inflation
expectations are more important than short-term expectations, with the latter tending to be
more volatile and sensitive to both commodity prices and the prices of frequently-purchased
goods and services. The Federal Reserve, the ECB, and the BOE all claim that their
longterm inflation expectations (e.g., five years ahead) remain well anchored at around 2 percent.
This is confirmed for the United States and the euro area by economic forecaster data on
long-term inflation expectations (Chart 2). On the other hand, long-term inflation expectations
have exceeded the target for over five years in the United Kingdom because of various
factors including exchange rate depreciation, energy price increases, a hike in the
valueadded tax, and rises in various administered and regulated prices. However, its inflation
expectations have started to fall recently since the highlighted effects have dissipated.
Situation in Japan and a conundrum regarding inflation expectations
The BOJ adopted its 2 percent price stability target in January 2013, followed by the launch
of quantitative and qualitative monetary easing (QQE) in April of the same year. These
initiatives are aimed at overcoming the mild deflation that has lingered for 15 years in Japan.
A distinct feature of the QQE is that it aims not only to achieve 2 percent inflation at the
earliest possible time, but also to raise long-term inflation expectations from the current low
level of around 1 percent to around 2 percent, and then stabilize them at around 2 percent. In
this sense, the BOJ's monetary easing objective differs from those of other central banks.
These banks aim to increase aggregate demand and thereby support economic recovery,
while maintaining the current situation where long-term inflation expectations are already
stable at around 2 percent.
Japan's long-term inflation expectations (e.g., five years ahead) have averaged about
1 percent from 1995 to early 2014. This is somewhat perplexing since both realized inflation
and short-term inflation expectations (e.g., one year ahead) remained consistently below
long-term inflation expectations and often faced mild deflation. Relatively higher long-term
inflation expectations may be attributable to the public's long-held belief that prices will
eventually rise; this is particularly relevant for those who experienced the oil crisis in the
1970s and the bubble period in the 1980s. Chart 2 also indicates that Japan's inflation
expectations are more volatile than those in the United States, the euro area, and the United
Kingdom (before the global financial crisis). This suggests that Japan's inflation expectations
have not yet been anchored.
Against this backdrop, QQE was meant to produce a regime change in monetary policy
thereby raising realized inflation and inflation expectations toward 2 percent. This approach
is similar (but conducted in a reverse manner) to that adopted by the then Federal Reserve
Chairman Paul Volcker in 1979-1983. The recent rise in the realized inflation in Japan is
largely attributable to the consumption tax hike from 5 percent to 8 percent in April 2014
(Chart 2). Even excluding this temporary effect, inflation is now around 11⁄4 percent and
shows a steady rise from the recent bottom of minus 0.5 percent recorded in March 2013.
The BOJ projects that inflation is likely to be around 11⁄4 percent for some time, and thereafter
follow a rising trend again from the second half of this fiscal year. Similarly, a sharp rise in
short-term inflation expectations (e.g., one year ahead) during 2013 mainly reflects this tax
effect. Thus, a drop in expectations from over 2 percent to below 2 percent in April 2014
reflects an evaporation of the tax effect. On the other hand, since long-term inflation
expectations (e.g., five years ahead) do not incorporate this tax effect, the recent signs of an
increase are encouraging. Based on various indicators related to inflation expectations of
households, firms, and market participants, the BOJ judges that long-term inflation
expectations are generally on a moderate rising trend; however, whether this trend continues
should be closely monitored, as these indicators show some different movements.
It is clear that, since the QQE adoption, Japan's economy has shown positive signs of
moving out of deflation (Chart 2). Some firms seem to be increasingly confident about raising
their sales prices by providing innovative products and services and thereby tapping
demand. An increasing number of households appear to be enjoying employment and
nominal income growth. Transforming the public's deflation-oriented mindsets and their
resultant risk-averse economic behavior will take some time, but positive developments are
gradually but steadily spreading in the economy. Going forward, monetary policy should
continue to support the transformation process and economic recovery. The government's
growth strategy to strengthen the potential of Japan's economy combined with firms'
initiatives mean that it is possible to first achieve the 2 percent price stability target and to
subsequently sustain the 2 percent inflation in a stable manner. The expression "sustain the
2 percent inflation in a stable manner" is considered equivalent to the idea of stabilizing
longterm inflation expectations at around 2 percent. In other words, in such a situation, inflation of
around 2 percent would be realized as a medium-term average, as observed in other
advanced economies.
C. Unconventional monetary policy under the zero interest rate lower bound
In the face of the zero lower bound on nominal interest rates, the four central banks have
actively conducted "unconventional" monetary easing measures such as (1) large-scale
purchase of various financial assets, (2) forward guidance over the future monetary policy
stance, (3) longer-term liquidity provision facility, (4) long-term conditional lending, and (5) a
negative interest rate charge on reserves (Chart 3). In what follows, I will briefly touch on the
current initiatives taken by these four central banks.
Measure (1): Large-scale purchase of various financial assets
The Federal Reserve, the BOJ, and the BOE have performed large-scale asset purchase
operations to exert downward pressure on their longer-term interest rates that remain in
positive territory despite the policy rate reaching nearly zero. This policy is sometimes
referred to as quantitative easing. While sovereign bonds are the major assets purchased,
the Federal Reserve also purchases agency mortgage-backed securities (MBSs), and the
BOJ purchases diverse assets (treasury discount bills [T-Bills], corporate bonds, CP,
exchange-traded funds [ETFs], and Japan real estate investment trusts [J-REITs]). The
Federal Reserve is currently reducing the amount of asset purchases at a measured pace,
while the BOJ continues to purchase assets based at a pre-determined annual pace (a pace
currently clarified until the end of 2014). The BOE is maintaining its outstanding asset holding
amounts. Meanwhile, the ECB has taken a different approach by purchasing a limited
amount of financial assets and sterilizing the amount of sovereign bonds purchased under its
securities market program (SMP). In June 2014, the commitment to sterilizing those bonds
purchased was suspended because inflationary concerns had dissipated. Moreover, the ECB
decided to intensify preparatory work related to the outright purchases of asset-backed
securities (ABSs) as a credit easing policy, rather than as a quantitative easing policy.
Measure (2): forward guidance
All four central banks have adopted forward guidance: this refers to a communication
strategy undertaken by central banks to provide information to the markets and the public on
their future monetary policy stances. Of the four, the Federal Reserve, the ECB, and the
BOE apply forward guidance mainly to their respective short-term policy interest rates - the
operational target for monetary policy - and provide guidance to the markets and the public
about how long they expect to keep the current low interest rates. In contrast, the BOJ
applies forward guidance to its QQE as a package, and not on its policy interest rate. This is
because its operational target was shifted from the uncollateralized overnight call rate to the
monetary base. Once the size of the annual pace of increase in the monetary base is set, the
approximate increase in Japanese government bond (JGB) purchases is decided
accordingly; hence, there is a close link between the monetary base and the amount of
assets purchased. The BOJ then uses forward guidance to inform the markets and the public
of its intention to maintain the monetary base increase and thus asset purchases in the
future.
Measure (3): Longer-term liquidity provision facility
The ECB and the BOJ currently have longer-term liquidity provision facilities to assist the
funding of financial institutions and to foster their lending activities to promote economic
activity. The ECB is conducting longer-term refinancing operations (LTROs) with a fixed
interest rate and a full allotment. The ECB previously offered LTROs with three year maturity
terms in December 2011 and February 2012: currently, LTROs are available under a three
month maturity term until December 2016. Meanwhile, the BOJ conducted several one-year
liquidity operations during April and May 2013 to cope with the volatile JGB market. While
liquidity operations with maturity levels of up to one year are still available, the BOJ currently
mainly provides three-month operations.
Measure (4): Long-term conditional lending
The BOJ was the first central bank, under the zero interest rate lower bound, to introduce a
long-term lending facility where the amount of lending to financial institutions is conditional on
the increased lending by these institutions to the private sector. The aim is to promote
lending activities by financial institutions. The BOJ currently operates two programs: (1) the
fund-provisioning measure to support strengthening the foundations for economic growth
(the Growth-Supporting Funding Facility) introduced in 2010 (provision of funds at a 0.1
percent fixed interest rate for up to four years, based on the increased lending and
investment realized by the financial institutions toward strengthening the foundations for
economic growth); and (2) the fund-provisioning measure to stimulate bank lending (the
Stimulating Bank Lending Facility) introduced in 2013 (provision of funds for up to four years
and of up to twice the net increase in the financial institutions' lending without a limit).
Subsequently, the BOE adopted the Funding for Lending Scheme (FLS) in 2012, allowing
financial institutions to borrow U.K. Treasury bills at a low cost in exchange for all eligible
collateral depending on their realized net lending to small and medium-sized enterprises
(SMEs). Moreover, in June 2014, the ECB newly introduced Targeted LTROs by providing
long-term funds (for a maximum of three to four years) to financial institutions up to a total of
three times the net increase in private-sector lending excluding mortgages, with a fixed
interest rate at 10 basis points plus the prevailing interest rate of the main refinancing
operations (MROs).
Measure (5): Negative interest rate charge on reserves
The ECB introduced a negative interest rate (negative 0.1 percent) on excess reserves and
lowered deposit facility interest rates to the same negative rate in June 2014, in conjunction
with a cut in other policy interest rates. Meanwhile, the Federal Reserve and the BOJ
maintain a positive respective 0.25 percent and 0.1 percent interest rate on excess reserves.
The BOE applies a positive 0.5 percent rate on total reserves. In general, central banks
maintain positive interest rates on (excess) reserves for various reasons, including
maintaining the proper functioning of the interbank markets. If interest rates on reserves are
negative, the interbank markets could shrink, and this could generate a situation where
financial institutions are unable to promptly raise funds from the markets when most needed.
Since the interest rate on reserves provides the floor for interbank market interest rates,
keeping this rate in positive territory could mitigate large fluctuations in the interbank market
rates. This enables a central bank to smoothly provide sufficient liquidity and to expand its
balance sheet as a quantitative easing policy.
Meanwhile, some expect positive aspects from introducing a negative interest rate, such as
tackling exchange rate appreciation and lowering the bank lending rate. For example, in
Denmark, Danmarks Nationalbank applied a negative interest rate on its certificate of deposit
(CD) facility from July 2012 to April 2014 to fight massive capital inflows and to defend its
peg against the euro under the Exchange Rate Mechanism II (ERM II). As a result, a positive
effect was observed in leading to currency depreciation and maintenance of the peg.
However, the lending rates were largely unaffected and the amount of lending actually
dropped.
D. Emphasis on financial stability and its relation to monetary and
macroprudential policies
The global financial crisis has led each country to place increased importance on
macroprudential policy, given that stability in the financial system as a whole may not be
achieved solely through the existing microprudential policies. This arises from the globally
shared view that the "Great Moderation" period - which continued until the mid-2000s -
successfully achieved general price stability but failed to prevent the global financial crisis.
Macroprudential policy focuses on financial institutions and the markets (and their
relationships) as major constituents of the financial system, as well as on the effects of the
relationship between economic activity and the financial system. In this regard, central banks
closely monitor macroeconomic and financial market developments, collect information
regarding financial transactions, and function as the lenders of the last resort to individual
financial institutions with the aim of ensuring financial system stability. Thus, the use of these
specific skills, knowledge, and functions is considered effective in optimizing the effects of
macroprudential policy. As a result, there is a growing consensus that central banks have an
increasing role in macroprudential policies to maintain financial stability.
However, there is an open question on the correct balance between macroprudential policy
decisions and monetary policy decisions for a central bank. For example, monetary
tightening, such as an interest rate hike, is generally an appropriate policy option, particularly
when there are signs of heightened inflationary pressures or when rapid credit growth and
asset price bubbles are emerging across sectors. This is even true in the case of containing
an increasing risk of financial imbalances when the realized inflation has already been
sustained at the target level or when long-term inflation expectations remain well anchored.
However, problems may arise when a central bank is conducting monetary easing over a
long period in a protracted downturn phase of the economy. In this circumstance, inflation
may remain below the target for an overly long time and long-term inflation expectations may
have begun to decline, while financial imbalances such as bubbles may have started to
appear. In such a situation, a central bank needs to continue monetary easing to both fulfill
its mandate to maintain price stability and avoid a loss of credibility by failing to meet the
inflation target. The problem arises because such a policy may increase the risk of further
credit growth and amplify asset bubbles and may thus create a dilemma. These issues are
becoming relevant in recent years. Some advanced economies including Belgium, Norway,
Sweden, Switzerland, and the United Kingdom appear to be facing a rapid increase in
housing prices, while their CPI inflations remain low and/or below the inflation targets.
Greater focus on macroprudential policy by the central bank community
The above tradeoff between price stability and financial stability suggests that assigning too
many objectives to monetary policy without allocating sufficient policy tools may be
potentially problematic. Thus, the active use of macroprudential policy by central banks is
widely considered as a first line of defense against emerging financial imbalances.
Macroprudential policies are measures that affect the behavior of financial institutions, and
the Committee on the Global Financial System (CGFS) considers that they can be classified
into (1) capital-based measures, (2) liquidity-based measures, and (3) asset-side measures.2
Capital-based measures include countercyclical capital buffers (CCBs) that are incorporated
in the Basel III framework and sector-based capital buffers. Liquidity-based measures include
a liquidity ratio, a limit on net open positions in foreign currencies, and a reserve requirement.
Asset-side measures include credit volume controls, a loan-to-value (LTV) ratio (mainly
applied for housing and real estate loans), a debt-to-income (DTI) ratio, and various taxes
related to real estate transactions. Of these, there is a focus on CCBs as a practical
macroprudential measure in some advanced economies. While CCBs are scheduled to be
applied in each country in 2016, Switzerland took thelead by instituting their activation from
July 2012, where the Federal Council makes CCB decisions based on the Swiss National
Bank recommendations. The CCBs can either be applied as aggregate based and/or sector
based; and the sector-based capital buffers of 1 percent was applied for residential
mortgages in February 2013, and subsequently doubled to 2 percent in June 2014.
On the institutional aspect of conducting macroprudential policy, the United Kingdom has
made a substantial institutional reform. Its Financial Policy Committee (FPC) was established
within the BOE to conduct macroprudential policy, while its Monetary Policy Committee
(MPC) continues to engage in monetary policy. The FPC seems to be currently seeking
specific means to encourage coordination with the MPC. The MPC has recently expressed
increasing concerns over the surge in housing prices and the expansionary trend in
mortgages in the low interest rate environment, and considers that macroprudential policy
should be used as a first line of defense to mitigate the related systemic risks. The CCBs are
considered to be important macroprudential measures, and in May 2014, the FPC was given
responsibility for setting the CCB rate by the government. In line with its new responsibility,
the FPC decided to set the rate at zero percent in June 2014. In the same month, the FPC
also made recommendation to the Prudential Regulation Authority (PRA) to apply a
DTI-ratio-like measure on residential mortgages.
Meanwhile, the European Union (EU) has learned the lesson that the lack of a cross-border
banking monitoring and management system resulted in a delayed, inadequate response to
the crisis. This promoted the move toward the Banking Union. In a major step, the Single
Supervisory Mechanism (SSM) will commence operations in November 2014, with the ECB
playing a supervisory role in monitoring the soundness of major banks. Moreover, the EU
established a union-level body known as the European Systemic Risk Board (ESRB) in
2010, where the president of the ECB serves as the head of the Board and other members
include governors of national central banks, a representative of the European Commission,
and senior officers of relevant regulatory institutions in the region. The ESRB's task is to
identify risks related to the financial system and to provide recommendations to national
regulatory authorities when necessary.
In the United States, the Financial Stability Oversight Council (FSOC) - whose members
include the Chairman of the Federal Reserve - was established in 2010 as an institution
responsible for monitoring the potential risks related to financial stability and for making
recommendations to the Federal Reserve on prudential regulations and supervision. In
Japan, the Financial Services Agency (FSA) - the primary financial regulatory authority -
and the BOJ decided in June 2014 to hold a semi-annual joint meeting to exchange views on
financial stability. This move reflects the coordinated efforts to promote financial system
stability by making contributions in their respective fields of responsibility. In this regard, the
BOJ conducts on-site examinations and off-site monitoring of individual financial institutions,
and thereby carries out various analyses on financial system stability and related risks from
macroprudential perspectives. The BOJ also publishes a semi-annual Financial Stability
Report.
Use of liquidity-absorbing operations to maintain financial stability
While macroprudential policies are generally considered as the first line of defense against
financial imbalances, there has recently been an increasing focus on the application of an
interest rate on excess reserves and/or reverse repurchase agreements as another possible
method of containing the ample liquidity circulating in the money market.3 As a central bank
is able to set such an interest rate on its own, it may be able to control bank reserves and
thus, can possibly affect the stability of the financial system by encouraging financial
institutions to hold ample liquidity with the central bank. Importantly, a central bank can
implement this measure while retaining the ability to affect the short-term interest rate, so
that a tradeoff in terms of price and economic stabilization goals can be limited. The
application of these tools is actively debated in the United States recently in the context of a
smooth exit policy to normalize market interest rates while maintaining abundant liquidity
within the Federal Reserve. At the same time, using these tools to maintain abundant excess
reserves for long periods is also considered to be potentially useful to contain excessive
investment and lending by banks and thus prevent asset price bubbles.
III. Changes in monetary policy conduct in the Asia-Pacific region
Now, I would like to turn to the Asia-Pacific region covering nine economies. Following the
East Asian economic crisis of 1997-1998, many central banks in the region shifted away
from the rigid dollar peg system and at the same time, their monetary policy frameworks also
changed. As a result, there is some degree of convergence with regard to their monetary
policy conduct, although there is still considerable diversity. I would like to highlight five
common features: (1) a growing emphasis on price stability; (2) the highly-flexible
inflationtargeting framework; (3) allowing greater movements in the exchange rates; (4) a low policy
interest rate in the face of large capital inflows; and (5) extensive use of macroprudential
policy to maintain financial stability.
A. Growing emphasis on price stability
All of the region's central banks emphasize price stability or, in other words, the maintenance
of low and stable inflation as their monetary policy objective. The central banks in New
Zealand, the Philippines, Singapore, South Korea, and Thailand specify price stability as
their monetary policy mandate. The Reserve Bank of Australia (RBA) encompasses three
mandates (stability of the domestic currency, full employment, and the economic prosperity
and welfare of the Australian people), with these objectives being expressed in practice by
the inflation target. The Bank Indonesia (BI) defines rupiah stability as the stability of general
prices; in practice, maintaining low and stable inflation is considered the primary monetary
policy objective. Similarly, the mandate of Bank Negara Malaysia (BNM) is to maintain
monetary stability or ringgit stability that is thought to be preserved by price stability. The
objective of monetary policy in China is to maintain renminbi stability.
Regardless of differences in terms of how to express the mandate, all nine central banks
equally emphasize the importance of achieving price stability. Six economies (Australia, New
Zealand, South Korea, Thailand, the Philippines, and Indonesia) attempt to achieve price
stability by officially adopting an inflation-targeting framework that will be explained later
(Chart 4). China pursues price stability through its monetary aggregate target (M2) and
Singapore uses an exchange rate anchor. The International Monetary Fund (IMF) classifies
Malaysia in a category with no explicitly-stated nominal anchor but rather monitors various
indicators in conducting monetary policy. All central banks, with the exception of those in
Malaysia and Singapore, provide numerical inflation targets. China sets an inflation target for
each year in approximately March of the relevant year, with the target for 2014 being
3.5 percent. Other central banks provide inflation targets under the inflation-targeting
framework that will be explained next.
B. The highly-flexible inflation-targeting framework
In the Asia-Pacific region, six central banks have adopted an inflation-targeting framework.
New Zealand and Australia were regional frontrunners, adopting it after experiencing high
inflation rates in the 1970s and early 1980s. New Zealand was the first to develop the
framework in 1988, subsequently followed by Canada (1991), the United Kingdom (1992)
and Australia and Sweden (1993). These moves were motivated by two considerations:
(1) ensuring that the inflation that had started to decelerate in the second half of the 1980s
would continue to be contained; and (2) the statistical relationship between monetary stock
(or exchange rates) and inflation had become unstable, making it necessary for these central
banks to adjust their monetary policy frameworks.
In East Asia, South Korea was the first to adopt the inflation-targeting framework in 1998,
followed by Indonesia and Thailand (2000), and the Philippines (2002) (Chart 5). In
particular, South Korea, Indonesia, and Thailand were forced to abandon the de facto U.S.
dollar peg policy because of massive speculative attacks during the East Asian economic
crisis, providing them with an opportunity to review their monetary policy frameworks. The
Philippines shifted from monetary-targeting to inflation-targeting, following global trends and
based on the need to demonstrate a firmer commitment to controlling inflat