brian wynter : the role of monetary and exchange rate policy in jamaica remarks by mr brian wynter, governor of the bank of jamaica, to the government of jamaica, national debt exchange, kingston, 12 february 2013. * * * ladies and gentlemen, i propose to focus my remarks on the role of monetary and exchange rate policy in the context of the transaction as well as over the life of the extended fund facility that is currently being negotiated with the imf. the core objective of bank of jamaica is to maintain price stability. over the life of the programme, therefore, monetary policy will aim at maintaining single digit inflation which eventually will be brought into line with our major trading partners. we will conduct monetary policy within the framework of a flexible exchange rate regime in which the rate is allowed to adjust so as to facilitate the preservation and enhancement of price competitiveness within the jamaican economy. we expect that this policy, along with the raft of structural reforms in the programme, will induce medium - term improvements in the current account of the balance of payments. the programme, when endorsed by the imf, will also unlock access to bilateral and multilateral financing that, together with an expected normalisation in confidence and private capital inflows, will support much needed reserve accumulation. in this context, the programme will contain clear targets that will safeguard the adequacy of our gross international reserves. to further enhance the operation of the foreign exchange market, the bank will develop and introduce measures aimed at enabling the market to intermediate lumpy flows and efficiently deal with volatility. this process will commence with initiatives to facilitate a better information and price discovery process. i will now turn to some of the things the bank will be doing in the context of this transaction. first, it bears mentioning that the bank, as a major holder of goj bonds, will be participating in the exchange with 100 % of its holdings. for the rest of the financial system, the bank considers the preservation of financial system stability to be of extreme importance. our technical team has reviewed the debt exchange offer in detail and has run various stress tests that assure us that the temporary impact on financial institutions ’ profitability and capital adequacy will be manageable. nonetheless, in order to ensure financial stability, the government has revived the financial system support fund ( “ fssf ” ), which will be administered by the financial regulatory council on behalf of the minister of finance. the form of support that the fssf will

that accounting for observed inflation in our models helps us to better explain inflation. this is likely to reflect – among other things – that following a period of high ( or low ) inflation, some prices may need to adjust by more ( or less ) to restore relative prices to equilibrium. contracts and government policies that index charges to inflation also contribute to this persistence. reflecting this, we often model this part of the price - setting process using a moving average of past inflation, with more weight on the recent past than on the distant past. our approach implied that the recent bout of high inflation would be embedded in firms ’ price - setting decisions for years to come. but is this a good assumption in all conditions? at the time of our recent august monetary policy statement, we altered our price - setting assumptions so that they adapt more quickly to a low inflation environment. this is a judgement that we have had to make with perspective, empathy and courage. the outcome was material to our policy decision in august, giving us more confidence to reduce our policy interest rate. other changes in pricing behaviour are equally challenging to model. for example, it ’ s possible that firms ’ price - setting behaviour has been ‘ scarred ’ by the recent period of high inflation. but it could also normalise more quickly. there is evidence to suggest that people ( businesses and households ) pay more attention to the state of the economy when inflation is high and volatile. by contrast, when inflation is low and stable, people have less to gain from understanding the nuances of the inflation outlook as they often have better things to do. this is coined ‘ rational inattention ’. 11 firms also adjust prices more frequently when inflation is high as it becomes more costly not to keep up. 12 alan blinder famously remarked that price stability is when “ ordinary people in their ordinary course of business are not thinking and worrying about inflation ”. 13 _ _ _ _ _ _ _ _ _ _ _ _ 11 we observe ‘ rational inattention ’ in survey data of new zealand households ( bayarmagnai, 2023 ). 12 this dynamic is influenced by rigidities arising from menu costs and strategic complementarities in firms ’ pricing decisions. 13 blinder ( 1995 ). these dynamics give us reason to assume that price - setting behaviour may normalise quickly as we return to a low inflation environment. rationally, attention will go elsewhere. implications for the mpc ’ s monetary policy strategy in new zealand, uncertainties about firms ’ price