The Moorish Wanderer

Thesis Working Paper n°3

Posted in Dismal Economics, Read & Heard, The Wanderer, Tiny bit of Politics by Zouhair ABH on March 17, 2011

In his March 1968 Presidential address, Milton Friedman[1] summarized the broad aims of every mainstream economic policy: ‘high employment, stable prices, and rapid growth’. He was also quick to point out that these goals are not always easy to bring together, and while these aims seem to be the consensus among economists, instrument policies designed to implement these objectives do not elicit the same agreement.

Monetary Policy is one of these instruments that were the subject of much debate; The global economy moved from a decade-long era of low inflation and robust growth –both of which were considered to be partly the result of sound monetary policy- to that of an economy hurled into financial turmoil, and ultimately, into persistent depression. Central bankers, just like government, put together policies and instruments to deal these economies out of recession in ways that were unimaginable a couple of years ago (ironically, Friedman finds the tight FED policy in the 1920’s as a factor in the Great Contraction. It seems Central bankers today did not make the same mistake). Although there is much debate about the efficiency of monetary policies –especially on the long run-, the fact remains, the historically low levels of interest rates are contributing to sustain world growth and OECD growth in particular. In contrast with other policy instruments, monetary policy moved to be a subtle tool, one that is not as interventionist as, say a fiscal stimulus or tax cuts, but proves to be, at least in the short run, a very powerful and effective instrument.

Just as Friedman underlined, monetary policy is there to avoid mistakes. And it seems that this negative proposition somewhat overshadows the other assigned objective to the Central Bank, namely ‘to provide a stable back-ground for the economy’ (Friedman does acknowledge the monetary policy’s ability to balance off non-monetary shocks, though). Later on, empirical research by Taylor[2] (1993) provides policy makers with both a theoretical and practical tool to engage in a more active (but not necessarily activist) policy scope in setting interest rates.

We deal with the following: In a game theory setting, the central bank has to assign levels of interest rates and output as targets for the economy (i.e. other players) to factor-in their own computations. These targets are not computed ex-nihilo; they are the outcome of preferences over two main variables, i.e. the levels of inflation and unemployment, both of which are considered to be the main, if not the only parameters the monetary policy-makers care about. We shall prove that, if a certain set of conditions is met, the monetary policy can deliver systematically optimal welfare for the economy. We shall also verify that this optimal welfare is a Nash and strategy-proof equilibrium as per a social choice function designed by the Central Bank. As a policy-maker, the first step is to delineate the Central Bank’s preferences over levels of inflation and unemployment, levels that can be proxy for setting interest rates and output gap targets, these targets are in turn set so as to reach a certain common welfare (whose existence and salient properties are to be proven and verified in the process)

Barro & Gordon[3] (1981) provided a simple but accurate model of Unemployment and Inflation, which will be adapted to fit in some game theory axioms used in this paper. The Barro-Gordon model can then be used to describe the Central Bank’s preferences and thus provide insight of the way of it computes both interest rates and output gap. This preliminary study of the Central Bank’s own preferences is crucial to the other players in the economy, as it conditions, up to a point, their own expectations and ultimately, their response to the Central Bank’s decisions. We shall also verify whether pre-commitment and other institutional arrangements (such as independence from the Government or ‘special interest’ groups) can help to reach a Pareto-optimal social welfare. Once conditions of rationality and Pareto-optimality are verified, The game theory setting will provide us with elements defining the equilibriums –if there are any-, first in a simple bargaining process between the Central Bank, and a Private Firm. We shall then move to a multi-players game, and verify again that earlier predictions about the Central bank’s preferences can yield an optimal welfare to the economy. Finally, we shall consider the conditions whereby the ‘Lucas Critique[4] effect is either minimized, or precluded altogether.

We shall consider the improved version of Kydland & Prescott (1977) model, by Gordon (1980):

Where Ut and Utn are respectively the unemployment rate and the ‘natural’ rate of unemployment,  πt and πte respectively the inflation rate and the equilibrium, ‘anticipated’ inflation rate. As a policy-maker, the central bank values these parameters, but does also take into account a ‘social cost’ function defined by the deviation of both variables from respective anchor values:

We shall however use an altered version of the said model, namely by introducing different axioms/assumptions, mainly about the use of the information set and the inflationary expectations. The rational expectation equilibrium πt is computed on the assumption that “Because there are many private agents, they [the agents] neglect any effect of their methods for formulating πte on the policymaker’s choice of πt[5]. We will not however retain such assumption;

Indeed, in the first very simplified instance, Central Bank faces only one private agent – and so inflationary expectations are going to be part of a strategic game, the information set will have a different use to both players. Then, in a more generalized setting, the Central Bank faces n non atomistic players, which means that their own inflationary expectations cannot be treated as given by the Central bank. Quite the opposite, the social function it devises has to be strategy proof with respect to each player’s anticipations.

This non-atomicity assumption is essential in computing the Central Bank’s desired level of inflation (and thus, the target levels of interest rates and output gap). It goes without saying that the proposed equilibrium in the Barro & Gordon model does not fit in this particular instance. The equilibrium can no longer be computed directly as a rule, but becomes a strategic game whereby each player has a certain type preference over unemployment and inflation (and react accordingly when recording signals of interest rates and output gap), and it is up to the Central Bank to devise a social function that completes the objectives assigned above.

[1] Milton Friedman, ‘The Role Of Monetary Policy’ Presidential Address to the 80th Meeting of the American Economic Association. The American Economic Review, Vol. LVIII, Number 1 March 1968

[2] Taylor, John B. ‘Discretion versus Policy Rules in Practice’ Carnegie-Rochester Conference Series on Public Policy (1993)

[3] Robert Barro & David Gordon, ‘A Positive Theory of Monetary Policy in a Natural-rate Model’ Working Paper n°807, NBER November 1981

[4] Tesfatsion, Leigh ‘Notes on the Lucas Critique’ Iowa State University (2010)

[5] Robert Barro & David Gordon, p.34

Thesis Working Paper n°2

Posted in Dismal Economics, Read & Heard by Zouhair ABH on January 11, 2011

Description of the Monetary Policy as a bargaining process between two players:

a. Players features: The Central Bank (CB) and a representative private firm (PF) bargain for a pair are respectively were i(e) and Y(e) the equilibrium interest rate and output.

Each player has specific preference utility function, where the bank seeks to stabilize output via interest rate (in optimal settings, it would systematically set up interest rates so as to maximize potential output). We assume for the time being that the central bank does not take into account inflation directly into its computations (inflation is captured by the potential output). Central Bank’s preferences are captured by an altered version of the Taylor Equation such:

The Private firm, on the other hand, has a preference for high output and low interest rates, which means that its utility function is such:

This is due to the fact that the firm prefers low interest rates for valuation purposes and investment cost. High output generates higher profits and higher levels of cash flows (leading to higher valuation again).

It can be inferred from these preferences that both players have contradicting interests (and in facts the Firm does not take into account the potential output) and so the bargaining model is an attempt to seek an equilibrium.

b. Game: The game is a mapping


Where :





The bargaining is a standard Rubinstein-Osborne model, where the set of agreement pairs is described as follows:


The game starts with the Central Bank announcing a pair . The firm has the choice of accepting the pair or rejecting it. If it accepts it, the game is over, and the economy produces Y(e) at an interest rate i(e).

If it rejects the Bank’s proposal, then the game moves to stage 2, whereby it’s the firm’s turn to propose a pair

The bank has in turn the choice of settling for it, or moves to stage 3, and proposes another pair,

and so on and so forth. We assume that the actions take in a finite time set T, but at each period t, the proposed set from one player or the other is such:

This can be explained as the ‘price of disagreement’. For the central bank, it is damaging its policy-making credibility, or because danger of inflation, when not dealt with at the time, compels the bank to be more stringent in pushing for scheduled higher interest rates and lower output target (and by computation, a negative output gap). As for the firm, the punitive discount rate can be explained either by the uncertainty risk or because of the future negative effects non controlled inflation has on its valuation or profits.

The assumptions described in Osborne & Rubinstein on the extensive form hold: each player has a continuum of choices over the pair (i,Y). For this game to lead to a subgame perfect equilibrium, the following properties are to be verified:

1/Disagreement is the worst outcome: that can be easily verified with the punitive time factor: at every node of bargaining, the worst outcome is to reject the offer, as the utility derived from the next stage is lower than the previous one.

2/ Desirability for a particular outcome is embedded in both players’ preferences as described earlier on

3/ Time is valuable, and is also verified with the punitive discount factor δ.

4/ Continuity: the assumption of continuity needs to be discussed. As specified before, both players have defined intervals respectvely for interest rates and output. The series are therefore bounded but also converge to equilibrium state because it is the

most desirable at every node of the bargaining process:




5/ Stability is also defined by the effect of discount time factor.

6/ Increasing loss to delay: the discount factor also fulfils the condition.

This game has therefore a perfect subgame equilibrium. That means, at every node of the game, the reached equilibrium is part of the larger game, and because utility out of a Nash agreement is higher at stage t-1 compared to stage t, both parties have every incentive to agree right from the start. Next piece is dealing with the requirements the Central Bank has to meet in order to be credible in its decision/announcement.

Thesis Working Paper n°1

Posted in Dismal Economics, Read & Heard, The Wanderer by Zouhair ABH on December 23, 2010

This year is definitely being bitchy all the way down to early spring. Can it get any worse? (I am masochist, so It’s a bit of wishful thinking)

I’m getting pieces together for the thesis; it’s definitely going into game theory as a theoretical background in describing how a central bank should set the optimal interest rate, and how the fact that rate can be credible when a certain set of conditions are satisfied. I am having an enormous amount of fun in trying to get things going around… In an economic universe, the Central Bank has few objectives to fulfill: “stabilizing inflation around an inflation target and stabilizing the real economy, represented by the output gap“. (Svensson, 1999) the output gap is a reference to the gap between the actual GDP and the optimal GDP, or potential output, and can be roughly computed with the labour and net capital productivity, plus the total productivity factors, which can be proxy for technical innovation (or how to combine factors differently to get a higher output, or the same amount of output for lower level of capital and labour)

Because I claim to be a monetarist, and because I am fully in favour of an independent -but responsible before an elected body of representatives- central bank, I believe this institution is the one adequately geared to influence other players into accepting it as the best level of interest rate they should act upon. The game theory technique is there to prove that it can set a rate and an output target such that all players -that is economic actors- would stand by the targets as credible signals and would yield larger common welfare if they did not.

There is of course a strong assumption going on about the Central Bank’s motives: following institutional backgrounds, banks like the Federal Reserve has a triple objective to fulfill: inflation, growth and employment (Federal Reserve act, Section 2.a) the European Central Bank on the other hand, is mainly focused on inflation, and growth is a purely secondary objective, contrary to the Fed whose 3 objectives are of equal importance; these are even more stressed upon when put in perspective with regard to the kind of relationship their entertain with the political power; There is a wide-range consensus among economists about the virtues of an independent Central Bank, for all of the benefits it brings in terms of credibility, and thus efficiency in monetary policy-making.  As for the Moroccan central bank (Bank Al Maghrib) things are certainly different, but that is another matter.

Another assumption is that other players are interest-rate sensitive: firms are likely to expand or restrain their investment; The assumption looks credible, even though there are occurrences of sub-optimal or indeed irrational decision-making regardless of what the levels of interest rates are. In a dynamic setting, some players, like the unions or households do not change their behaviour overnight, as indeed there is a certain delay (a lag variable that can empirically observed thanks to econometrics) and would therefore blur the bank’s decision;

– Starting/working assumptions:

The Central Bank handles interest rates setting and assigning to the economy a target output (or in most cases, a target output gap) both of which variables are set in a fashion such to maximize common welfare, namely by selecting a pair (r,Y) that yields to the Nash axioms (or at least, to start with, Pareto conditions). These decisions are taken subject to other players’ respective preferences sets. The Central Bank is considered benevolent, and pursues no agenda of its own (that is to say, the Nash pair is the Bank’s own preference).

The aim is to prove that in monetary policy, there exist a Nash pair (r,Y) for which common welfare is maximized, and that Game Theory techniques and findings would help describing mechanisms and strategies that would allow the Central Bank, under specified conditions, to reach this equilibrium set over time. The difference with the ‘regular’ Game Theory setting and the present attempt to model the monetary policy lies in lotteries and risk aversion. The first one is relegated to random events (as perhaps used in econometric study) the second one would be rather about time preferences, as we can assume that agents value time, and would rather reach an agreement sooner rather than later.

Therefore, the starting concepts for this paper are going to be related to bargaining issues: for each Player i there is a function [f(r,Y)] called a utility function, such that one lottery is preferred to another if and only if the expected utility of the first exceeds that of the second.

– Simple Model: We borrow elements from the bargaining model as specified by Osborne & Rubinstein with a simple monetary set: two players, Central Bank (CB) and a Business Firm (BF) in an economy, which have to reach agreement on a specific set (r,Y). Both have their own preferences (CB’s is exogenous to its own condition) We keep the definition 2.1. For the agreements pair (S,d) where S is the set of all feasible pairs (r,Y). Of all Nash axioms (SYM, PAR, IIA & INV) only the symmetry assumption has to be dropped, as CB and BF display different preferences. The feasible set of pairs (r,Y) is divided up between desirable pairs’ sets –to which both players want to yield- and worst outcome possible (WOP) which both players want to avoid at any price. (and is the primary component of bargaining cost)The border between both sub-sets is set by the economy’s own productive capacities (or indeed how far the output gap can be sustained without slipping down into recession) Let us start with the bargaining game of alternating offers, and define monetary policy setting as follow:

1/ CB announces a pair (r,Y) to BF. BF has three ways to go: accept the pair, refuse it or refuse it and submit to CB an alternative pair. If BF accepts or refuses point blank, the game is over, and both parties reach a pair (r,Y) that belongs to the disagreement pair, an outcome both of which are made worse off when reached.

2/ CB, in turns, accepts the pair, refuses it or re-computes another pair (r,Y) and submits to BF.

3/ The game is rolling as long as each players refuse the proposed pair and proposes another.

We have to assume beforehand that CB has access to complete information (a fair assumption as CB uses resources to obtain sufficient information to make an accurate decision- an assumption to be discussed later on) and therefore whatever decision made is necessarily optimal. We can also assume that BF has access to complete information as well, and knows why CB fields its strategy. We also assume both players to adopt an optimal strategy at each point of the bargain, that is, that they are able to order their preferred pairs and play them accordingly at each knot of the game.

This proves that an equilibrium set of pairs (r,Y) can be reached very quickly, as both players know each others’ respective preferences, and if there are resistances from one part or the other, the disagreement –that is, the delay in reaching agreement- does not go further than a couple of periods. In a sequential equilibrium however, ‘We can interpret the equilibrium as follows. The players regard a deviation as a sign of weakness, which they “punish” by playing according to a sequential equilibrium in which the player who did not deviate is better off. Note that there is delay in this equilibrium even though no information is revealed along the equilibrium path.’

This can be used to provide a first-hand punishment deterrent to hurry both CB and BF to reach an equilibrium pair. The time value can be used as well, as indeed the longer both parties reach agreement, the more painful –or indeed the less desirable- the equilibrium pair would be. In real life, that is the case when CB fails to convince other economic players that they will stick to their decision, or that their announcement was not credible. That compels the bank to come after with a much stringent, more constraining announcement, something that could have been avoided if they took their signal seriously in the first place. As mentioned before, the central bank has objectives to stabilize inflation by setting optimal interest rate, and computing optimal (resp. minimal) output (output gap). For the time being, we set up for the output gap, as described in the paper by Gaspar & Smets. Their starting assumption was that both the Central Bank and the private sector (in our case, BF) observe the potential output, an assumption that can be deemed to be realistic, in view of semi-perfect information universe they evolve in.

The inflationist food for thought

Posted in Dismal Economics, Moroccan Politics & Economics by Zouhair ABH on June 26, 2010

According to the latest (to date) IMF working paper concerning Morocco, everything is going fine in Morocco; Indeed,

Moroccan banks are stable, profitable, adequately capitalized, and resilient to shocks, but the financial system as a whole will need to adapt to the inherent risks of changing macroeconomic policies and conditions. Major reforms have been achieved since the 2002 FSAP within a policy of actively promoting economic and financial sector opening”.

So in essence, the banking and financial system is stable. It is however, quite fragile, or rather, should develop some more resilient mechanisms. The IMF namely states that:

BAM and other supervisory bodies require the necessary operational independence and resources, supported by accountability structures, to conduct an autonomous monetary policy and effective supervision. The authorities have taken welcome steps in this context, and promulgated the new articles of incorporation of BAM confirming its autonomy, a new banking law, a new anti-money laundering law, and a large number of secondary regulations.

The Moroccan economy is doing well, admittedly because of the sound macroeconomic policy successive governments followed since the late 1990’s. These policies included low inflation-oriented policies, conservative fiscal policy, and shy attempts in implementing a policy rate by conceding more autonomy to the Central Bank. This set of policies is considered to be the standard and sound macroeconomic policy every responsible government should follow.

Let us first tackle the inflation policy. Bank Al Maghrib made an announcement of the ‘target inflationfor 2010, and set it to 1.2%, a rate of historical low of course. It is, however, a figure quite difficult to match, because of the other economic parameters party in ‘shaping’ the inflation rate.

According to the Bank’s own monthly monetary report (Dec.2009), inflation rate set at 1.4% in September 2009, a figure in line with the global inflation (due mainly to the effects of a global recession).

Going back to the inflation policies, the national/total consumption is considered to be of sizable influence on inflation rate (I will come back on that later on). Basically, the report points out:

La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008.

Globalement, les principaux indicateurs disponibles à fin octobre laissent présager la poursuite de la bonne orientation de la consommation des ménages durant les prochains trimestres.’

(a trend confirmed in the June issue : ‘Au total, la consommation finale nationale devrait croître en 2010 à un rythme situé entre 6 et 7% en termes réels.’)

Now, Olivier Blancard, with other economist colleagues, produced an interesting piece (rather a working paper, really) a couple of months ago for the IMF. Rethinking Macroeconomic Policy; and there was a bit about inflation policy:

Stable and low inflation was presented as the primary, if not exclusive, mandate of central banks. This was the result of a coincidence between the reputational need of central bankers to focus on inflation rather than activity (and their desire, at the start of the period, to decrease inflation from the high levels of the 1970s) and the intellectual support for inflation targeting provided by the New Keynesian model. In the benchmark version of that model, constant inflation is indeed the optimal policy, delivering a zero output gap (defined as the distance from the level of output that would prevail in the absence of nominal rigidities), which turns out to be the best possible outcome for activity given the imperfections present in the economy

What about our own policies on that matter? First off, let us have a look to the Bank’s views on inflation; the latest issue of the Revue de la Conjoncture Monétaire et Financière (May, 2010); They produced a couple of interesting graphs that speak for themselves:

Monthly versus Year-to-Date Inflation (Source: BAM)

The good news is, core inflation is pretty stable. Economists tend to use the core inflation rather than CPI (Consumer Price Index) fluctuations because they need to capture the relevant data, and oust any volatile random error term (mainly in econometrical techniques)

However, the graph below somewhat confirms a thesis I held to be true: our inflation is heavily correlated to current consumption goods (say, food like edible oil, sugar, wheat, etc…) as shown on the following graph:



Inflation component breakdown





While it is true inflation is gradually beaten down (which, ceteris paribus, is a good thing for the consumer), the Central Bank, as well as the Finance ministry, seem to have failed to address its volatility. In essence, the finance ministry implemented stabilizing inflation policies, succeeded in doing so, but only with the core inflation, and not on the CPI, which is quite critical, for it has a definite impact on the Moroccan consumers’ purchase power.

Blanchard then goes on: There was an increasing consensus that inflation should not only be stable, but very low (most central banks chose a target around 2 percent). […] In a world of small shocks, 2 percent inflation seemed to provide a sufficient cushion to make the zero lower bound unimportant. Thus, the focus was on the importance of commitment and the ability of central banks to affect inflation expectations.

Leaving the neo-Keynesian theoretical background aside, the kind of inflation the Moroccan economy experiences is of the highest interest to me: I believe every sound government and every sensible Central Bank should make inflation control policy on of their top priorities (beside economic growth and addressing inequalities, for the ministry that is).

However, it is quite odd that, while it undeniably preserves purchase power and good public finances, a certain ‘acceptable’ level of inflation is needed to boost businesses and, to some extent, help retail investors as well. In layman’s terms, the ‘good level’ of inflation alleviates the real debt burden a bit on businesses (for they actually pay lower real interest) and allow for retail investors to build up their portfolio on financial markets and exchange. However, the kind of inflation we are discussing here does not benefit to businesses neither household in Morocco.

We have seen earlier on that while core inflation is remarkably stable, the CPI components are much more volatile. And it is recognized to be so : Impactée principalement par des chocs ponctuels, l’inflation demeure modérée au cours des derniers mois. En effet, après s’être établie à 0,1% en février, l’inflation annuelle est passée à 0,9% en mars. L’analyse détaillée des différentes composantes de l’IPC laisse indiquer que cette évolution traduit exclusivement le renchérissement des prix des produits alimentaires volatils, l’inflation sous-jacente n’ayant que légèrement progressé, pour se situer à 0,2% au lieu de 0,1% un mois auparavant.

We are through the looking glasses here: the CPI is definitely what makes the inflation rate goes up, and there are several ways to explain it so:

CPI underlying commodity prices went up on the period from Q4 2009 to Q2 2010. It is quite possible, for a constant domestic demand, to take on inflation because of a rise in commodity prices. The first idea is to look at future commodities indices. According to the Bloomberg figures, futures prices were quite volatile from October 2009 to May 2010, but were they

Various composite commodities index (Bloomberg)

Let us take an even more systematic approach. The following graphs depict Exchange Traded Commodities tracking benchmark indices, all of which give a fair idea of how likely the commodities’ prices behaved during the past 6 months. The selected commodities benchmark are Oil Brent for Oil (ETF Securities Brent Oil Index), then the UBS CMCI Wheat Index for Crop/Wheat and finally UBS CMCI Sugar Index for Sugar. (All of which are listed on the London Stock Exchange, and for anyone interested in discussing the technicalities of index rebalancing as well as the relevant choices, I would with vivid alacrity)

CPI inflation in Morocco looks quite decorrelated with respect to commodities fluctuations

The result is quite puzzling: there seems to be no noticeable relation (lagging or dynamic) between inflation fluctuations, and the selected commodities, though these are most important in the Moroccan consumption basket. The commodities’ prices are, therefore, not the main explaining factor for the CPI inflation.

Domestic demand went up on the same period:

‘La consommation finale nationale devrait croître de 7,3% en 2009, rythme moins rapide que celui des trois dernières années mais qui demeure supérieur à la moyenne de la décennie. Concernant plus particulièrement la consommation finale des ménages, elle devrait augmenter de 7,1% après une progression moyenne de 10,9% durant la période 2006-2008’.
Basically, in a moody conjecture, the main variable that pulled our economic growth was the domestic consumption.
My two cents are up. I shall write very soon on the topic of inflation and conumption relation. However, It must be pointed out that the Central Bank and the FInance Ministry, while achieving a relative success in dealing with inflation, the two bodies failed in addressing volatility inflation, and thus, the main objective every policymaker should make theirs: stable long term growth.

The Independant Deterrent

Posted in Moroccan Politics & Economics, Tiny bit of Politics by Zouhair ABH on April 15, 2010

Now, I know that’s a bit unorthodox from a radical.

Save for “nationalistic” stuff, the largest weakness the Left post-1989 was Economics and economic policy. Perhaps that’s why social-democracy, which is more centrist policy-wise-, was pursued in Europe and under Clinton. I still retain some reservation on how those governments were pushed into devising policies that were not at the best public interest, just for the sake of deficit reduction and inflation-embattling. Not that I am against those, but the Center-left parties didn’t actually explore the whole range of policies (did they lack the guts, or is it because of their electorate primary target? Or was it far beyond their I can’t tell…)

Anyway, what I wanted to talk about is the role the Central Bank should play in the Moroccan economic structure, as well as on the Financial Markets. It is not, so to speak, a ‘bread and butter’ issue (although, when you think about it, it is, in a sense) but I think, it should take place in the great Constitutional Change Morocco is in a dire need for.

To put it simply, the Central Bank (Bank Al Maghrib) should enjoy a total independence from the government body –namely, the Finance Office and the Treasury as well-. In ideal facts, the Governor is answerable only to the Parliament, which sets up a public committee, just like the Fed and the US Congress.

It might look simple, but it is not. Why do we need the Central Bank to be free from any interference from the Government’s departments? Well basically, the idea is that, even though the majority coalition/party has a mandate from the people, they are bound to go for the ‘eye-candy’ policies (tax breaks, expanding investment) that are all targeted to some sub-populations, which does not always square with other important variables, such as interest rates, inflation, and ultimately, unemployment and economic growth. I am not saying governments are usually irresponsible (I am not referring to the Moroccan case only) but when unconstrained, they tend to make a mess out of the economy when they have a full mandate (I don’t mean necessarily an absolute majority, but the institutional tools to achieve their objectives). In essence, an independent Central Bank eliminates the cheapest way for a government to finance its programs, i.e. by artificially creating money, monetary inflation as it were. Of course, it also eliminates a precious tool (interest rates or Dirham devaluation) when difficult conjecture allows for or even obliges the governments to do so, though the central bankers are usually aware of such fluctuations, and quit frankly, it is part of their job to forecast, anticipate and jugulate these cycles.

Another detail that could perhaps be of interest to the financial markets: a Central Bank free of any interference from the Ministry led by an independent-minded governor is a strong positive signal that once a policy stated, the Bank will not derive from it, and subsequently, they would act upon it as a token. Before I start explaining why, amid the constitutional reform so badly needed, a credible Central Bank is a plus; According to Blinder (2000), “the concept of credibility has become a central concern of the scholarly literature on monetary policy […]credibility matters in theory, and it is certainly believed to matter in practice— although empirical evidence on this point is hard to come by because credibility is not easy to measure. The survey (Blinder gathered data from 84 Bankers members of the Bank Of International Settlements) started with a deliberate blurred definition of credibility, as it begun with the dictionary definition, i.e. the ability to have one’s statements accepted as factual or one’s professed motives accepted as the true ones. It seems the definitions Central Bankers fielded were heterogeneous, though not wholly contradictory; it evolved mainly around Long-term interest rates, as well as how anti-inflation policy is doing. In a more theoretical tone, Kyland & Prescott (1977), there’s a way in measuring credibility; it could be summed up in the following equations –that are assumed to hold true


This is a modified version of the Phillips curve equation with inter-temporal expectations, π being the inflation rate, πe the expected inflation rate, u unemployment rate and z is a bundle of goods (supply commodities) [the rest are parameters relatively easy to compute with econometric techniques, plus a ‘noise’ error term ε]

Without going too much on detail, a credible bank is able to deliver a minimal difference between the expected and actual inflation rate. No Central Bank uses such target, but it is useful to see how good it does in dealing with inflation.

2). the second equation links unemployment rate deviation to interest rates r.

3. is a ‘trade-off’ function. L is the liquidity loss variable the Bank has to compensate (and under optimization rules, minimize); α measures the inflation aversion. The function is a tradeoff in the sense that the k parameter is the probability for the Banker to cheat and deliver an unexpected inflation -and therefore minimize the Liquidity loss artificially. The equations are all linked, with the bottom line being the Liquidity loss compensation. It underlines the important effects interest rates have on unemployment and inflation. The effects are intertemporal and involve a great deal of expectations and projections, all of which are function –to an extent- of the Central Bank’s credibility and commitment to keep inflation low, and so the long-term interest rates.

This could of course provide a starting point of measuring how credible a Central Bank could be; In other terms: “a central bank’s pronouncements are credible only if it attains a higher level of expected utility by following through on its promises rather than reneging. In other words, duplicity is to be expected unless truthfulness is in the central bank’s self-interest. One way to induce the central bank to carry out its pledge to fight inflation is for the government to write an incentive-compatible contract for its central bank. The author proposed an additional term to the equation 4 (as a penalty in case they cheated for ‘cheap’ compensation) but there’s another way to get it right; Furthermore, a credible Banker is such that his determination to stabilize long-term interest rates –and therefore inflation- is beyond reproach. The other important parameter (as it appears in the paper) was about ‘independence, indeed, according to the finding, most Central Banks agreed strongly on this particular point, it ranked much better with respect to the next reason in line.

As for how it could be effectively measured, one could offer an estimation –thanks to econometrical techniques of the α and k parameters (though data is quite incomplete in this area, I promise I will venture some sketches about it)

Before I move on, I sense the question is looming: ‘surely the Central Bank’s main concern should be about jobs, while it focuses in a rather obsessive way, on inflation’. That’s true. But then again, its up to the Finance and Employment offices to carry on effective policies –not involving inflation of course-. Actually, high or ‘concentrated’ inflation damages the common people more than any other class of society. It is amazing how a leftist government –or a left-leaning politician- feels more inclined to squash unemployment than fight-off inflation, while both are equally dangerous (well not so much, but both are harmful) There is indeed a tradeoff between both variables, but it all boils down to the long-term thinking most politicians (in Morocco anyway) lack. On a related topic, an independent Central Bank tends to go ‘technocratic’ and sometimes, biaised towards business and supply-side lobbies (thanks to their monetarist stance I should say…) Anyway I will come back on the various safeguards that could prevent it to do so, and instead, serve the common good (and not only the financial markets). This whole introduction on theory is to prove a point: a credible Bank has to be independent –in order to achieve its commitment to embattle inflation

How are things in the real world, or shall we say, the Moroccan context?

The Central Bank (Bank Al Maghrib) has a long history, though with little if no power right from the start. A little bit of history perhaps: Bank Al Maghrib, formerly Bank Of Morocco, was instituted in June 1959 (A. Ibrahim Premiership and A. Bouabid as finance minister) by virtue of Dahir n° 1-59-233. In essence, the bank acts a great deal like a super-paymaster-enforcer for the finance minister, plus there’s the business of blurred relation between the Civil service (theoretically answerable to the government), the Bank and the Monarchy (that got hold of virtually everything). Of course, that’s 1959, many things changed since then.

The 2005 Dahir brought some new things (I can’t find it in the Government Secretary’s gazette, if anyone has got the link, thanks a lot), for instance, no Civil servant or private Bank representative could be member of the committee board and indeed, the Bank is from now on the guarantee of monetary stability as well as monitoring the markets. That’s a good start, but it fails to address the relationship with the government. The latter still appoints 2/3 of the board.

Another thing: the Governor is virtually answerable to anybody –only perhaps to the only empowering authority, i.e. the King-. The present state of BAM is quite interesting, as it’s a pure bureaucratic institution, theoretically close to the government but actually very autonomous. However, because only a Dahir gives or takes away its prerogatives, its independence is hindered by this opaque tie.

I’ve got this example to show that BAM is quite submissive, or rather, cannot prevent government actions, even when they are perceived to be harmful to the economy; In 2003, the Jettou government was in between two minds about devaluating the Dirham. The Bank, on the other hand, was adamant in its refusal (at the time, there was no real immediate benefit to do so, and in the long run, it makes the Balance of Payment deficit even worse.) Funnily enough, there was a time the Bank wasn’t even aware there was devaluation. The government caved in for a lobby, period.

There was another row late 2009, when the Governor A. Jouahri refused to consider another devaluation.

That’s why the Bank has to keep its independence and all its prerogatives (among which to contribute or not to devaluation) off the government, because it is not credible in its commitments (as they change their minds fairly easily) Of course, in a real answerable and democratic government, such amateurism wouldn’t take place, and the Finance minister would be well advised to stick to their plans (if they have any, but then again, it’s always a pleasure to see a left-leaning finance minister advocating for privatization, a joke, really)

How do we solve this then? I don’t mind the Governor being appointed by royal Dahir (after all, it’s all the same in the UK, or any modern democratic monarchy) but there should be clarification on what it is meant by ‘with the advise of the Prime Minister or the Finance Minister (because, hey, an advise is not binding nor compulsory to follow, especially from an ectoplasm like A. Fassi, while a decision to sanction actually is, especially when it is someone lie A. Ibrahim)

Of course, there must be first a constitutional reform, so that the Bank would be of constitutional, rather than administrative legitimacy. The same bank, on the other hand, has to be answerable to Parliament, as the governor should give evidence to a public select committee (MPs, academics and members of government) and defend their decisions.

Again, I know this is a quite far-fetched policy for a left-wing radical, but I believe the economy has to be initially stabilized –through interest rates, unemployment and inflation- and then we can get on with our objective of cooperatives, public ownership and free information/innovation policies. Well, someone had to do the blue-sky thinking, shall we?