central bank of barbados tom adams financial centre, spry street, bridgetown p. o. box 1016 telephone : ( 246 ) 436 - 6870 : fax. ( 246 ) 436 - 7836 e - mail address : info @ centralbank. org. bb website : www. centralbank. org. bb remarks by mr. cleviston haynes governor, central bank of barbados at “ debt exchange – risks and opportunities : leveraging the jamaican experience ” courtney blackman grande salle thursday, november 15, 2018 on behalf of the management and staff of the central bank, i welcome everyone to this workshop, which is geared towards sharing insights on the functioning of the money and capital markets in the aftermath of the restructuring of barbados ’ domestic debt. i take this opportunity to thank ncb capital markets barbados limited for its willingness to share with us their experience and knowledge gained from the jamaica debt restructuring exercise in 2013. on june 1, 2018, the newly - elected administration announced the unprecedented decision that barbados had decided to suspend the servicing of commercial foreign debt payments and restructure both domestic and external debt. the purpose was to limit foreign reserves outflows, while securing meaningful and gradual debt reduction, thereby reducing financing needs and restoring debt sustainability. the subsequent launch of a comprehensive domestic debt restructuring exercise on september 7 2018, as a critical component of the barbados economic recovery transformation ( bert ) programme, achieved near unanimous acceptance of the debt exchange proposals, with 97 % participation by creditors. the terms of the new instruments involve some sacrifice by all bondholders, as government seeks to balance the fiscal imperatives, including anchoring the bert programme through a reduction in the debt - to - gdp ratio to 60 % by 2033, against the need to preserve financial stability and protect the long - term interests of small bondholders. the restructuring comes in the intermediate aftermath of the adoption of the new accounting standard ifrs9. this will have implications for how financial institutions, regulators and auditors assess balance sheets going forward. from a capital market perspective, the fundamental question is how will the domestic capital market behave? will activity decline and, if so, for how long? will investors be predisposed to some instruments over others? these questions are relevant given the size and comprehensive nature of the restructuring and the limited availability of alternative investment instruments. at the same time, new instruments and institutional arrangements are likely to influence the functioning of the market. the new debt instruments are markedly different from those that existed before

rapid changes in behavior, which implies monetary policy lags will be shorter when changes to the policy rate are large and rapid. as a second example, consider the frequency at which firms change their prices. data show that firms typically adjust their prices once a year, which is usually interpreted to mean that prices are “ sticky. ” however, recent evidence shows that because of the big inflation shock that occurred over the past two years, prices have changed more frequently as firms tried to keep their relative prices in line with rapidly changing market conditions. this fact has important implications for the phillips curve model that economists use to link unemployment and inflation. the shift in frequency of price setting will affect the slope ( the coefficient ), which indicates how sensitive inflation is to a change in unemployment. i addressed this issue in a speech earlier this year. 7 using historical data, where the frequency of price adjustment was about once a year, this had the effect of pinning down the slope of the phillips curve. the phillips curve was estimated to be very flat. see christopher j. waller ( 2023 ), “ the unstable phillips curve, ” speech delivered at macroeconomics and monetary policy, a conference sponsored by the federal reserve bank of san francisco, san francisco, calif., march 31, https : / / www. federalreserve. gov / newsevents / speech / waller20230331a. htm. - 9the implication is that unemployment has to increase a lot to bring inflation down by a small amount. but, with the more frequent price changes lately, the phillips curve has steepened. this steepening implies that monetary policy will affect inflation faster and with less effect on the unemployment rate than would occur if price changes were slower. so once again, the lags between changes in monetary policy and inflation should be shorter than historical experience tells us, and as is reflected in models. what is the implication of this economic research? the effects of policy tightening last year are feeding through to market interest rates faster than typically thought because of announcement effects, and on top of this we have had policy rate changes that have been more dramatic and faster than in the past which most likely has led to a more rapid adjustment in the behavior of households and firms. these two points suggest that the effects of the large policy changes that we undertook last year should hit economic activity and inflation much faster than is typically predicted. if one believes the bulk of the effects from last year ’ s tightening have passed through the