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Timing and duration of inflation targeting regimes

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  • Peter Claeys

Abstract

Central banks in G7 countries shifted to unconventional policy measures in the aftermath of the Financial Crisis, when faced with economic slack, financial instability and fiscal trouble. This shift ended a spell of rules-based time consistent monetary policy that started in the mid-1980s. I argue that substantial economic, political and financial risks put pressures on the continued support for a monetary regime. Central banks may be forced to adopt policies with no option to reset those options later on. I demonstrate with duration models – on a sample of industrialized and emerging economies from 1970 to 2012 – that the policy switch to inflation targeting happened after episodes with high inflation and public debt, reflecting broad support for stability-oriented monetary (and fiscal) policy. More generally, changes in monetary regimes occur after a crisis. High inflation makes central banks pursue active monetary policies, while they forsake those same policies in the wake of fiscal or financial crises. ****** Los Bancos Centrales de los países pertenecientes al G7 dieron un giro hacia políticas menos convencionales a raíz de las consecuencias de la crisis financiera, cuando se enfrentaron a la desaceleración económica, la inestabilidad financiera y las dificultades fiscales. Este cambio ha finalizado un período de políticas monetarias de larga duración basadas en normas que se iniciaron a mediados de los años ochenta. Expongo que los considerables riesgos económicos, políticos y financieros añaden una presión al apoyo continuo de un régimen monetario. Los bancos centrales pueden verse obligados a adoptar políticas sobre la marcha sin ninguna opción de restablecer aquellas opciones más adelante. Demuestro con modelos de duración –en una muestra de economías industrializadas y emergentes de 1970 a 2012– que el giro de políticas hacia las metas de inflación ocurrió despu’es de episodios con alta inflación y deuda pública, lo que refleja el amplio apoyo a las políticas monetarias (y fiscales) orientadas hacia la estabilidad. A rasgos generales los cambios en los regímenes monetarios se producen después de una crisis. La inflación alta supone que los bancos centrales aspiren a políticas monetarias activas, mientras que renuncian a esas mismas políticas al iniciarse una crisis fiscal o financiera.

Suggested Citation

  • Peter Claeys, 2015. "Timing and duration of inflation targeting regimes," Revista ESPE - Ensayos Sobre Política Económica, Banco de la República - ESPE, vol. 33(76), pages 18-30, April.
  • Handle: RePEc:col:000107:013844
    DOI: 10.1016/j.espe.2015.01.001
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    Cited by:

    1. Hove, Seedwell & Tchana Tchana, Fulbert & Touna Mama, Albert, 2017. "Do monetary, fiscal and financial institutions really matter for inflation targeting in emerging market economies?," Research in International Business and Finance, Elsevier, vol. 39(PA), pages 128-149.

    More about this item

    Keywords

    Policy regimes; Duration model; Rule; Fiscal policy; Monetary policy; Beliefs;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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