A Symposium Sponsored By The Federal Reserve Bank of Kansas City CENTRAL BANKING ISSUES IN EMERGING MARKET-ORIENTED ECONOMIES A Symposium Sponsored By The Federal Reserve Bank of Kansas City Jackson Hole, Wyoming August 23-25, 1990 Contents Foreword vii The Contributors ix Symposium Summary xix The Moderators LORD GORDON RICHARDSON, Chairman, Morgan Stanley International JEAN GODEAUX, Former Governor, National Bank of Belgium ISSUES AND OPTIONS The Role of Central Banks 1 PAUL A. VOLCKER, Former Chairman, Board of Governors of the Federal Reserve System Monetary Policy and the Control of Inflation , 9 JOHN W. CROW, Governor, The Bank of Canada Central Banks and the Financial System E. GERALD CORRIGAN, President, The Federal Reserve Bank of New York Currency Convertibility in Eastern Europe C . FRED BERGSTEN, Director, JOHN WILLIAMSON, Senior Fellow, Institute for International Economics iv Conrenrs POLICYMAKERS FROM EASTERN EUROPE AND THE SOVIET UNION Policy Dilemmas of Eastern European Reforms: Notes of an Insider 5 1 VACLAV KLAUS, Minister of Finance, Czechoslovakia Recent Developments in Poland WLADYSLAW BAKA, President, National Bank of Poland Recent Developments in Bulgaria IVAN DRAGNEVSKI, President, National Bank of Bulgaria Recent Developments in Yugoslavia MITJA GASPARI, Deputy Governor, National Bank of Yugoslavia Recent Developments in the Soviet Union 7 5 VICTOR V. GERASHCHENKO, Chaimuzn of the Board, State Bank of the U.S. S. R. Recent Developments in Romania 79 MUGUR ISARESCU, First Secretary, Economic and Monetary Afairs, Embassy of Romania DECEBAL URDEA, Governor, National Bank of Romania Recent Developments in Hungary IMRE TARAFAS, First Deputy President, National Bank of Hungary , Recent Developments in Czechoslovakia JOSEF TOSOVSKY, President, National Bank of Czechoslovakia Contents WESTERN DISCUSSANTS Monetary Policy and the Control of Inflation MARTIN FELDSTEIN, President, National Bureau of Economic Research LAWRENCE A. KUDLOW, Chief Economist, Bear, Stearns & Co., Inc. ALLAN H. MELTZER, Professor, Carnegie-Mellon University GEORG RICH, Director, Economics Division, Swiss National Bank NIELS THYGESEN, Professor, University of Copenhagen Central Banks and the Financial System ANDREW D. CROCKETT, Executive Director, 123 Bank of England MERVYN A. KING, Professor, London School of Economics PHILIPPE LAGAYETTE, First Deputy Governor, 135 Bank of France Currency Convertibility in Eastern Europe RICHARD N. COOPER, Professor, Harvard University JACOB A. FRENKEL, Economic Counselor and Director of Research, International Monetary Fund Contents ARNOLD C. HARBERGER, Professor, 157 University of California at Los Angeles OVERVIEW PANELISTS LEONHARD GLESKE, Former Member 167 of the Directorate, Deutsche Bundesbank ALAN GREENSPAN, Chairman, Board of Governors 177 of the Federal Reserve System 7he Attendees 183 The Symposium Series 188 Foreword Within the past year, a number of countries in Central and Eastern Europe have indicated their intent to move toward market-oriented economic systems. As part of the transition process, these countries are considering comprehensive economic reforms including the creation of independent central banks and the development of new financial markets and institutions. Central banks will play a crucial role in the ongoing transformation process. Through the conduct of monetary policy, central banks can promote the creation of a noninflationary macroeconomic environ- ment. Central banks can also assist in the development of a stable financial system and support expanded international trade through the maintenance of currency convertibility. To assist policymakers in these countries, the Federal Reserve Bank of Kansas City sponsored this symposium as a means to encourage an exchange of views on the role of central banks during and after the transition to market-oriented economies. ROGER- GUFFEY President ~ederai~eserve++Bank of Kansas City The Contributors Wladyslaw Baka, President, National Bank of Poland Mr. Baka was reappointed to a second term as president of the National Bank of Poland in September 1989. His first appointment to the post came in 1985, following five years in which he served as secretary, then vice chairman, of the government's commission for economic reform. Educated at Warsaw University, he began his career there in 1959 as a researcher and later, as a professor of economic sciences and a member of the Polish Academy of Sciences. As president of his nation's central bank, Mr. Baka represents Poland in the World Bank. He has chaired the Polish delegation at a number of international councils. C. Fred Bergsten, Director, Institute for International Economics Mr. Bergsten has been director of the Institute for International Economics since its creation in 1981. He was assistant secretary of the U.S. Treasury for international affairs from 1977 to 1981, and also served as undersecretary for monetary affairs during 1980-81. Earlier, he was a senior fellow at the Brookings Institution and on the senior staff of the National Security Council where he was assistant for international economic affairs. He is a widely published author and testifies frequently before Congressional committees. Richard N. Cooper, Professor of International Economics, Harvard University Mr. Cooper has been at Harvard since 1981. He sewed as under- secretary for economic affairs in the U.S. State Department during x Contributors the Carter Administration, and was a provost and professor of international economics at Yale University. From 1961 to 1963, he was a senior staff economist for President Kennedy's Council of Economic Advisers. Mr. Cooper is chairman of the board of direc- tors of the Federal Reserve Bank of Boston, and holds other leader- ship positions with the Institute for International Economics, the Chief of Naval Operations, and the Committee for Economic Development. He also belongs to the Trilateral Commission and the Council on Foreign Relations. E. Gerald Corrigan, President, Federal Reserve Bank of New York Mr. Corrigan was named to his present position in 1985. He began his career at the New York Fed in 1968 as an economist in the domestic research division and held a variety of staff and official positions before being named special assistant to Federal Reserve Board Chairman Paul Volcker in 1979. Mr. Corrigan became president of the Federal Reserve Bank of Minneapolis in 1980 and served four and a half years there before returning to New York. He is a member of the Council on Foreign Relations and the Trilateral Commission. Andrew D. Crockett, Executive Director, Bank of England Mr. Crockett first joined the Bank of England in 1966, serving in the Economic Intelligence and Cashiers Departments. He was named personal assistant to the managing director of the Interna- tional Monetary Fund in 1972 and later became chief of the Fund's Special Studies Division, assistant director of the Middle East Department, and deputy director of the Research Department with primary responsibility for the World Economic Outlook project. Mr. Crockett rejoined the Bank of England in March 1989 as executive director for Overseas Affairs. John W. Crow, Governor, Bank of Canada Mr. Crow was appointed governor of the Bank of Canada in 1987. He joined the Research Department of the bank in 1973 and sub- sequently served as adviser to the governor, deputy governor, and senior deputy governor. Before going to the Bank of Canada, he worked at the International Monetary Fund from 1961 to 1973. Mr. Contributors xi Crow is a member of the board of directors of the Federal Business Development Bank and the Canada Deposit Insurance Corporation. Ivan Dragnevski, President, National Bank of Bulgaria Mr. Dragnevski became president of the National Bank of Bul- garia in 1989. He began his professional career with an appointment there in 1964. He represented the Bulgarian Foreign Trade Bank in London during the mid-1970s. He was named director general of the Bulgarian Foreign Trade Bank in 1977 and president in 1980. He continued in that position until receiving his present appointment. Martin Feldstein, President, National Bureau of Economic Research Mr. Feldstein is professor of economics at Harvard University as well as president of the National Bureau of Economic Research. Since joining the Harvard faculty in 1967, his research and teaching have focused on problems of the U.S. economy and the economics of the public sector. From 1982 through 1984, he was chairman of President Reagan's Council of Economic Advisers. He is a fellow of the Econometric Society and the National Association of Business Economists, and belongs to the Trilateral Commission, the Council on Foreign Relations, and the American Academy of Arts and Sciences. Jacob A. Frenkel, Economic Counselor and Director of Research, International Monetary Fund Mr. Frenkel was appointed to his current position in 1987. Before joining the International Monetary Fund, he was the David Rock- efeller Professor of International Economics at the University of Chicago. He is a research associate of the National Bureau of Economic Research, a fellow of the Econometric Society, a member of the Group of Thirty, and a member of the advisory committee for the Institute for International Economics. Mitja Gaspari, Deputy Governor, National Bank of Yugoslavia Mr. Gaspari came to the National Bank of Yugoslavia in Novem- ber 1988, after serving a number of years with the National Bank of Slovenia. He joined the National Bank of Slovenia as an analyst in the research center in 1975 and became the center's director in 1981. xii Contributors He was named vice governor of the National Bank of Slovenia in 1987 and deputy governor in June 1988. In his present post, he also serves on the Federal Economics Council at the Federal Executive Council and as a member of the working group for monetary and banking reform. Victor V. Gerashchenko, Chaimuzn, State Bank of the U.S. S. R. Mr. Gerashchenko was appointed to his present position in 1989. He began his career with the U. S.S.R. Bank for Foreign Trade. He served as director of the Moscow Narodny Bank Ltd. in London, and was governor of both the Beirut and Singapore branches.