Sunday, April 27, 2008

Has inflation targeting stood the test of time?

Ilian Mihov, Andrew K. Rose (2008). Is Old Money Better than New? Duration and Monetary Regimes. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008-13. http://www.economics-ejournal.org/economics/journalarticles/2008-13. [pdf] To excerpt from their conclusion:

Inflation targeting seems like it would be a monetary regime that would compare poorly using the filter of time. After all, IT is a relatively new monetary regime. Nevertheless, we have found that IT seems already to have withstood the test of time; the duration of IT regimes is already as long as or significantly longer than alternatives like fixed exchange rates. Unlike all other monetary frameworks, no country has yet been forced to abandon a regime of inflation targeting in crisis. And this duration matters, since more durable monetary regime are systematically associated with better inflationary outcomes, meaning inflation within a band of (0, 4%). While having an exchange rate fix is better than having no clear quantitative target for monetary policy, inflation targeting is more likely to be associated with good inflationary outcomes. Any extrapolation of the heretofore successful record of inflation targeting remains exactly that: an extrapolation. Still, IT seems to work in both theory and practice, and is spreading quickly. Most importantly, inflation targeting is developing a reputation for durability, something that cannot be said of many alternative monetary regimes. Perhaps the monetary mishaps of the past will soon be seen as the byproduct of antiquated monetary regimes.

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