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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

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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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  1. Stefan Krause & Fabio Mendez, 2003. "Policy Makers' Preferences, Party Ideology and the Political Business Cycle," Emory Economics 0319, Department of Economics, Emory University (Atlanta). [Downloadable!]
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  2. Persson, Torsten & Tabellini, Guido, 1999. "Political economics and macroeconomic policy," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 22, pages 1397-1482 Elsevier. [Downloadable!] (restricted)
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  3. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. 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). [Downloadable!]
  2. 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. [Downloadable!]
    Other versions:
  3. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta). [Downloadable!]
  4. 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. [Downloadable!]
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