caleb m fundanga : the central bank, the media and the legislature – can they work together? remarks by dr caleb m fundanga, governor of the bank of zambia, at the 35th anniversary of the central bank of swaziland, mbabame, 21 may 2009. * * * governor m. g. dlamini, fellow central bank governors, your excellencies the members of the diplomatic corps, distinguished guests, ladies and gentlemen, and may i simply say all protocol observed, mr. chairman, it is indeed a great pleasure for me to be with you today as we commemorate the 35th anniversary of the central bank of swaziland. i consider it a great honour and privilege, on behalf of the bank of zambia and indeed on my own behalf, to have been invited to give a keynote speech at this historic event. mr. chairman, allow me to first of all congratulate the central bank of swaziland, the government and all other stakeholders for having come a long way in promoting the effective conduct of monetary policy in this great country over the last 35 years. we at the bank of zambia have noted the important role that the central bank of swaziland has played not only in the development of the swazi economy, but in enriching the knowledge of central bankers throughout the region, through its participation in the regional groupings such as the committee of central bank governor ’ s in sadc. therefore, as you celebrate this great milestone, we join you in anticipating further progress and effectiveness in the execution of your mandate. mr. chairman, the central theme of my address today is the important role that information plays in economics in general and in financial markets in particular. in 1970, some 39 years ago, or 4 years before the establishment of the central bank of swaziland, an economist called george akerlof published a paper called “ the market for lemons. ” by lemons he was referring to used cars in the united states of america. akerlof, who would later win the nobel prize in economics for his work, demonstrated how information asymmetries between two contracting parties, a used car seller and a used car buyer, could lead to an inability of the car dealer to sell cars. more broadly, the moral of his story was that information asymmetries that allowed for no credible assessment of value of a given transaction, could lead to market collapse – in this instance the market for used cars. mr. chairman

– it was just not possible to control inflation. and then we would have ended up with no social benefits – no more growth, no extra jobs – but with high and stubborn inflation instead, just as it did for burns. but the story of south african central banking, in the democratic era, is not one of regret. the 1980s and early 1990s made it very clear that high inflation creates uncertainty, destroys savings, and undermines growth. the growth / inflation trade - off doesn ’ t work. we realised that inflation targeting, as a transparent and accountable policy framework, provided our best shot at price stability with growth. in fact, the inflation - targeting era has been one of lower inflation and lower interest rates than prevailed previously. following our mandate, inflation has been kept under control. 4 even now, at this very difficult time for the economy, we can see the inflationplease see arthur burns, 30 september 1979, ‘ the anguish of central banking ’, available at http : / / www. perjacobsson. org / lectures / 1979. pdf, p. 15. 2 ibid, p. 13. 3 precisely, cpi inflation averaged 6. 5 % during burns ’ tenure as fed chair ( february 1970 – march 1978 ). for the 1970s as a whole, inflation averaged 7. 1 %. for the 1960s, it was 2. 3 %. for the 1950s, it was 2. 1 %. ( data from the st louis fed fred database. ) 4 for this period, inflation has averaged 5. 9 %. the volatility of growth, inflation and interest rates has also been lower. specifically, for the periods 1970 - 2000 and 2000 - 2020, the standard deviation of growth has declined from 4. 3 to 2. 6, the standard deviation of inflation has fallen from 3. 9 to 2. 4, and the standard deviation of interest rates ( the lowest sarb lending rate ) has gone from 4. 9 to 2. 5. the pattern of lower volatility following the introduction of inflation targeting also holds when contrasting 1980 - 2000 with 2000 - 2020 ( i. e. two 20 - year windows ). targeting framework functioning properly, delivering historically low interest rates in the context of low inflation. what are the chances, 20 years from now, that we will still have price stability and low interest rates? will we be agonising, 20 years from now, over how we lost control of inflation? today, there is a new