Under the Bank of Jamaica Act (1960), the conduct of monetary policy is aimed at regulating the growth of money and credit in line with the resources expected to finance economic activity and generate employment, without undermining the conditions of price stability. This is in keeping with the Bank's main objective of safeguarding the value of the domestic currency. The other key objective of ensuring the stability of the financial system is organically related but operationally separate from the conduct of monetary policy.

In formulating monetary policy, the Bank takes into consideration any prevailing and prospective developments in the macro economy, fiscal operations, emerging external sector developments and other relevant market information that would influence liquidity conditions. In particular, identifying the sources of liquidity is a primary concern of the Bank, as the management of liquidity levels will ultimately result in stable prices in the economy.

Price stability is desirable because high and volatile inflation creates uncertainty in the economy and makes business planning difficult. Having stable prices in the economy creates a predictable environment that encourages investment and growth.

Since the Bank of Jamaica cannot directly determine the prices of goods and services in the economy, the bank chooses a set of operating and intermediate variables, which have a direct effect on the general price level. Thus, the Bank's monetary policy framework and strategy aims at using monetary targets to achieve the desired objective of price stability. The components of the policy framework are:

   1. The definition of the objective of monetary policy: Price stability
   2. Setting Operating Targets: Monetary Base and Interest Rates
   3. Setting Intermediate Targets: Exchange Rates and Money Supply
   4. Manipulation of Monetary policy instruments: Open Market Operations

In essence, the Bank's control over liquidity is effected through its management of the monetary base, (its operating target). Base money is the monetary aggregate, which is controlled effectively by the Central Bank and hence, provides the channel through which the Bank can manage liquidity levels. Adjustments in the monetary base affect interest rates, which in turn influence the level of credit and money supply, (its intermediate target), through the money multiplier process. Changes in these variables are ultimately aimed at maintaining a stable price level (its objective) and exchange rate.

The process described above relies upon a stable and consistent relationship between monetary conditions and the behaviour of the public. For Jamaica, the various channels through which monetary policy changes affect the domestic price level is depicted in Box 1. Within the transmission process, monetary policy actions will first affect the monetary base. The effects of monetary changes will transmit to domestic prices either through the money supply or through changes in the exchange rates.

Through daily monitoring of its operating and intermediate targets, the Bank of Jamaica can quickly assess whether its conduct of monetary policy is on the right track and can implement corrective action, rather than waiting to see the final outcome on the price level.

For more information on monetary policy please see Pamphlet on 'Monetary Policy Management in Jamaica' which is available in PDF format.