Difference between monetary policy goals and targets:
Macroeconomic policies, often referred to as stabilizing policies, are the to equalize the
economy, since economies have a tendency of going up and down (inflations), governmnets
uses these policies to curb these ups and downs. The goal of monetary policy in Namibia is
to ensure price stability in the interest of sustainable economic development of the country,
the Bank of Namibia is normally mandated to achieve certain goals such High Employment,
Economic Growth, Price Stability, Interest-Rate Stability, Stability of Financial Markets,
Stability in Foreign Exchange Markets etc. But central banks do not directly control these
variables. Rather they have a set of instruments such as open-market operations, setting the
repo rate, reserve requirements etc. which they can use to achieve these objectives.
The predicament of the Bank of Namibia is exacerbated by the fact that their instruments do
not directly affect these goals. These instruments affect variables such as money supply and
interest rates, which then affect goal variables with lag. In addition, these lags may be
uncertain. Due to above mentioned problems, in the conduct of monetary policy distinction is
made among (i) goals (or objectives), (ii) targets (or intermediate targets), (iii) indicators (or
operational targets), and (iv) instruments (or tools).
Targets, however, lie between goal and instrument variables. Target variables such as
money supply and interest rates have direct and predictable impact on goal variables and
can be quickly and more easily observed.
By observing these variables, the central bank can determine whether its policies are having
desired effect or not. However, even these target variables are not directly affected by
central bank instruments. These instruments affect target variables, through another set of
variables called indicators. These indicators such as monetary base and short run interest
rates are more responsive to instruments.
All central banks consequently pursue a different strategy for conducting monetary policy by
aiming at variables that lie between its tools and the achievement of its goals. The strategy is
as follows: After deciding on its goals for employment and the price level for example, the
central bank chooses a set of variables to aim for, called intermediate targets, such as the
monetary aggregates (M1, M2, or M3) or interest rates (short- or long-term), which have a
direct effect on employment and the price level. Namibia’s monetary policy framework is
underpinned by the fixed currency peg to the South African Rand. Under a fixed exchange
rate regime, monetary policy is submissive to the fixed peg. Maintenance of the fixed peg,
which is the intermediate target, ensures that the goal of price stability is achieved by
importing stable inflation from the anchor country.
However, even these intermediate targets are not directly affected by the central bank’s
policy tools. Therefore, it chooses another set of variables to aim for, called operating
targets, or alternatively instrument targets, the operational target is an economic variable
that the central bank wants to influence, largely on a day-to-day basis, through its monetary
policy instruments, such as monetary base or high-powered money or short run interest rate
(Rate on Treasury Bill, Overnight Rate). Although there is no formal operational target in
Namibia, the Bank of Namibia monitors the level of official reserves, as the fixed currency
peg requires the country to fully back its currency in circulation with international reserves to
import stable prices from South Africa
Therefore, the Bank of Namibia pursues this strategy because it is easier to hit a goal by
aiming at targets than by aiming at the goal directly. Specifically, by using intermediate and
operating targets, it can more quickly judge whether its policies are on the right track, rather
than waiting until it sees the outcome of its policies on employment and the price level.
The rationale behind a central bank’s strategy of using targets suggests three criteria for
choosing an intermediate target: It must be measurable, it must be controllable by the central
bank, and it must have a predictable effect on the goal.
The Bank of Namibia uses the operating and intermediate targets to direct monetary policy
toward the achievement of its goals.
By using intermediate and operating targets, the bank of namibia can more quickly judge
whether its policies are on the right track and make midcourse corrections, rather than
waiting to see the outcome of its policies on such goals as employment and the price level.
The Bank of Namibia policy tools directly affect its operating targets, which in turn affect the
intermediate targets, which in turn affect the goals.
Effective fisctal policy
5. independent Central banl