What are the main points and arguments of the author(s)?
•What is your opinion of the article? How does the article relate to your experience or current job in the public or nonprofit sector?
•How can the points and arguments of the author(s) be applied to the public sector in a practical sense?
The critique should be roughly 500 words in length (approximately two double-spaced pages). Be sure to cite all
borrowed, quoted, and paraphrased material appropriately in APA format. Your professor is most interested in your opinion (the second and third bullet points above).
Coordinating public debt and monetary management
One of the challenges facing countries that have begun to implement financial sector reforms is how to coordinate monetary and public debt management so that they are mutually supportive. The interplay between financial sector reforms and public debt management strongly suggests that it would be imprudent to undertake financial reforms without due consideration of public debt issues. To avoid obstacles in financial liberalization, the central bank and the finance ministry should closely coordinate with each other on public debt and monetary management issues. In the early stages of the reform process, a coordination committee is needed to ensure a forum for discussions between the two institutions. Also, units in charge of public debt management should be created for both the finance ministry and the central bank. Lastly, it should be noted that poorly conceived monetary instruments can undermine the development of a deep and active government securities market.
Full Text:
The interplay between financial sector reforms and public debt management strongly suggests that it would be imprudent to undertake financial reforms without due consideration of public debt issues. At the same time, it would be unwise to formulate a fiscal policy that ignores the importance of debt management for the development of financial markets.
As many countries, including several that formerly relied on central planning, have begun to implement financial sector reforms, one of the challenges facing them is how to coordinate monetary and public debt management so that they are mutually supportive. Indeed, the development of financial markets is an interactive and evolutionary process–financial reforms have implications for public debt management and, conversely, debt management can contribute to, or impede, the reform process and monetary policy implementation Moreover, without active financial markets–particularly government security markets–there are few options for monetary management.
Financial sector reforms aim at improving resource allocation through increased emphasis on market signals Interest rate liberalization, central bank independence, and a more competitive financial system are key components of a liberalized financial system. These changes in the way the financial sector operates, however, bring with them the seeds of contradiction between public debt and monetary policy objectives. For while most of the objectives of public debt and monetary management are common or complementary (see “The final objectives of public debt and monetary management are common or complementary”), monetary policy goals are broader than those of public debt management; there are also short-term differences of strategy that may place monetary and public debt management policies at loggerheads.
In economies with liberalized financial systems and independent central banks, for example, it is not uncommon to find finance ministers complaining bitterly about high interest rates, or central bank governors harshly stating the need to reduce the fiscal deficit. There are also less publicized discussions on the access of the government to overdraft facilities at the central bank, on the maturity and profile of the public debt, and on intervention (and regulation) policies of the central bank in government security markets.
In a fully liberalized system, these divergences are part of the system of checks and balances and contribute to sound compromises and economic policies. During the process of financial reform, however, lack of coordination between monetary and public debt management can paralyze the reform process and result in costly slipups in policy implementation. The importance of adequate coordination never disappears, but it increases from the preparatory phase of the reform process to the middle (transitional) phase of the reform–where primary placement of government securities must have both public debt and monetary policy goals–before declining as direct central bank financing of the budget becomes marginal This article analyzes the links between monetary and fiscal policy, suggesting how the central bank and the treasury can work together toward common objectives.
