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Has Monetary Policy become more Efficient? a Cross-Country Analysis

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  • Stephen G. Cecchetti
  • Alfonso Flores-Lagunes
  • Stefan Krause

Abstract

Over the past 20 years, macroeconomic performance has improved in industrialised and developing countries alike. In a broad cross-section of countries inflation volatility has fallen markedly while output variability has either fallen or risen only slightly. This increased stability can be attributed to some combination of more efficient monetary policy making, a reduction in the variability of supply shocks, and changes in the structure of the economy. We develop a method for allocating performance changes among these factors. For 21 of the 24 countries we study, more efficient monetary policy has been the driving force behind improved performance. Copyright 2006 Royal Economic Society.

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Bibliographic Info

Article provided by Royal Economic Society in its journal The Economic Journal.

Volume (Year): 116 (2006)
Issue (Month): 511 (04)
Pages: 408-433

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Handle: RePEc:ecj:econjl:v:116:y:2006:i:511:p:408-433

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  1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  2. Stephen G. Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2004. "Has Monetary Policy Become More Efficient? A Cross Country Analysis," NBER Working Papers 10973, National Bureau of Economic Research, Inc.
  3. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.
  4. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy rules for inflation targeting," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
  5. Stephen G. Cecchetti & Michael Ehrmann, 2002. "Does Inflation Targeting Increase Output Volatility?: An International Comparison of Policymakers' Preferences and Outcomes," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.), Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 9, pages 247-274 Central Bank of Chile.
  6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  7. Stephen G. Cecchetti & Stefan Krause, 2001. "Financial Structure, Macroeconomic Stability and Monetary Policy," NBER Working Papers 8354, National Bureau of Economic Research, Inc.
  8. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment - Theory and Some Evidence," Discussion Paper 1998-116, Tilburg University, Center for Economic Research.
  9. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  10. James A. Kahn & Margaret M. McConnell & Gabriel Perez-Quiros, 2002. "On the causes of the increased stability of the U.S. economy," Economic Policy Review, Federal Reserve Bank of New York, issue May, pages 183-202.
  11. Alberto Alesina, 1988. "Macroeconomics and Politics," NBER Chapters, in: NBER Macroeconomics Annual 1988, Volume 3, pages 13-62 National Bureau of Economic Research, Inc.
  12. Stefan Krause, 2007. "Measuring Monetary Policy Efficiency in European Union Countries: The Pre-EMU Years," The IUP Journal of Monetary Economics, IUP Publications, vol. 0(1), pages 60-83, February.
  13. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
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