Pillars of Effective Monetary Policy
This subsection discusses the importance of Central Bank independence in achieving the CBA's primary objectives of price stability and financial stability. It highlights how independence strengthens credibility, enables timely decision-making, and allows the bank to focus on long-term goals, free from external influences. It also emphasizes the role of transparency and accountability in building trust and ensuring effective monetary policymaking.
Central Bank Independence
As enshrined in the 1st Article of the “The Law of the Republic of Armenia on the Central Bank of Armenia (CBA),” in accomplishing the objectives and functions reserved for it by the Constitution and laws of the Republic of Armenia, the CBA shall be independent from state authorities of the Republic of Armenia. The independence of the CBA plays a crucial role in allowing us to achieve and maintain our primary objectives of price stability and financial stability.
As a socially responsible public institution, we firmly believe that high levels of transparency and accountability serve as the foundation for our independence, and helps us to more effectively and prudently achieve our objectives. Of course, our objectives of price stability and financial stability are a means to an end. Our ultimate purpose is to improve the welfare of our nation and its people.
Central bank independence helps support monetary policy effectiveness in the following way: (1) Operational independence allows a central bank to make decisions focused solely on achieving its objectives, free from external influences. This strengthens the credibility of its policy framework, reassuring the public that decisions are based on sound economic analysis. Such credibility helps anchor inflation expectations and fosters trust in the central bank's ability to maintain price stability; (2) CB independence enables flexible and timely decision-making in response to changing economic conditions; (3) Independence enables the central bank to focus on long-term goals, maintaining low and stable inflation while also supporting sustainable growth in output and the economic wellbeing of its constituents, without being influenced by short-term considerations that can be harmful in the long-run.
Transparency and Accountability
We firmly believe in transparency and accountability as foundational and guiding principles for policymaking at the Central Bank of Armenia. Clear and effective communications are the principal means through which the central bank can achieve transparency in its policymaking and ensure that its policy decisions, motivation, and vision are well-understood by the public. In this sense, transparency serves as an important cornerstone for central bank accountability, and helps the public develop confidence and trust in the CBA’s monetary policymaking process. This cycle of transparency and accountability creates virtuous incentives for the institution’s staff and Board to do the right thing (learn more about Monetary Policy Transparency).
Communication and Forward Guidance
Clear and effective communication plays a crucial role in shaping market expectations and giving economic agents clarity about the policy stance. Our systematic communications framework is designed to: (1) Provide clarity on monetary policy objectives; (2) Offer transparency about the decision-making process; (3) Ensure policy agility in the face of risk, uncertainty, and dynamically evolving economic conditions; (4) Provide markets and stakeholders with a combination of qualitative and quantitative forward guidance; (5) Provide full transparency about the analytical and data toolkit the central bank uses to conduct analysis in support of its decisions;(6) Support and strengthen central bank credibility. Learn more about our CBA Monetary policy Communications framework.
Freely Floating Exchange Rates
The CBA employs a freely floating exchange rate regime, which means that we do not strive to maintain a specific level for the Armenian Dram (AMD) relative to other currencies. The level of exchange rates, rather, is determined by market forces (i.e. supply and demand dynamics of AMD, relative to other currencies in the world). Importantly, the freely floating exchange rate regime is consistent with the principles of liberalized capital account operations and the implementation of an independent monetary policy.