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Institutions, Arrangements, and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis

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  • Stefan Krause
  • Fabio Mendez

Abstract

We study how important monetary, exchange-rate, and fiscal arrangements are in determining the relative preferences of policy makers for inflation stability. We argue that focusing on policy intentions, represented by these preferences, constitutes a better way of evaluating policy behavior, instead of looking at inflation outcomes that may be unavoidable at times. Using a panel of 34 countries over a period of 25 years we find that a high degree of preference for inflation stability is significantly correlated only with central bank independence and membership to the European Monetary Union for low inflation countries, whereas for high inflation countries, only strict or flexible inflation targeting is relevant for inflation stabilizing policies. Finally, we find no robust evidence suggesting that either adopting an exchange rate anchor or employing fiscal policy contribute towards explaining an inflation averse behavior.

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Paper provided by Department of Economics, Emory University (Atlanta) in its series Emory Economics with number 0501.

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Date of creation: Jan 2005
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Handle: RePEc:emo:wp2003:0501

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Cited by:
  1. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
  2. Metin Ozdemir & Selim Tuzunturk, 2009. "Is price stability enough? Macroeconomic performance of inflation targeting in developing countries," International Journal of Sustainable Economy, Inderscience Enterprises Ltd, vol. 1(4), pages 352-372.
  3. Grégory Levieuge & Yannick Lucotte, 2012. "A simple Empirical Measure of Central Bank's Conservatism," Working Papers halshs-00827680, HAL.
  4. Etienne Farvaque & Alexander Mihailov, 2008. "Intergenerational Transmission of Inflation Aversion: Theory and Evidence," Economics & Management Discussion Papers em-dp2008-71, Henley Business School, Reading University.
  5. Stephen G Cecchetti & Alfonso Flores-Lagunes & Stefan Krause, 2005. "Assessing the Sources of Changes in the Volatility of Real Growth," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
  6. Canofari Paolo & Di Bartolomeo Giovanni & Piersanti Giovanni, 2013. "Theory and practice of contagion in monetary unions. Domino effects in EU Mediterranean countries: The case of Greece, Italy and Spain," wp.comunite 0098, Department of Communication, University of Teramo.
  7. Aleksandra Maslowska, 2008. "Quest for the best: How to measure central bank independence and show its relation with inflation?," Discussion Papers 37, Aboa Centre for Economics.
  8. Aleksandra A. Maslowska, 2011. "Quest for the Best: How to Measure Central Bank Independence and Show its Relationship with Inflation," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 5(2), pages 132-161, August.
  9. Pierre L. Siklos, 2008. "Inflation Targeting Around the World," Emerging Markets Finance and Trade, M.E. Sharpe, Inc., vol. 44(6), pages 17-37, November.
  10. Wai-Ching Poon & Gee-Kok Tong, 2009. "The feasibility of inflation targeting in Malaysia," Economics Bulletin, AccessEcon, vol. 29(2), pages 1035-1045.
  11. Stefan Krause & Fabio Mendez, 2006. "Does Opportunism Pay Off? A Study of Vote Functions and Policy Preferences," Emory Economics 0604, Department of Economics, Emory University (Atlanta).

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