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Institutions, arrangements and preferences for inflation stability: Evidence and lessons from a panel data analysis

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  • Krause, Stefan
  • Méndez, Fabio

Abstract

We study how monetary, exchange-rate and other institutional arrangements are associated with policy makers' preferences 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 24 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 Economic and Monetary Union for low inflation countries, whereas for high inflation countries only strict inflation targeting and, to some extent, central bank independence, are relevant for inflation stabilizing policies. Finally, we find no robust evidence suggesting that either adopting an exchange rate anchor or employing fiscal policy are associated with an inflation averse behavior.

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  • Krause, Stefan & Méndez, Fabio, 2008. "Institutions, arrangements and preferences for inflation stability: Evidence and lessons from a panel data analysis," Journal of Macroeconomics, Elsevier, vol. 30(1), pages 282-307, March.
  • Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:282-307
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    Cited by:

    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).
    2. 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.
    3. 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.
    4. Etienne Farvaque & Piotr Stanek & Stéphane Vigeant, 2014. "On the Performance of Monetary Policy Committees," Kyklos, Wiley Blackwell, vol. 67(2), pages 177-203, May.
    5. repec:kap:iaecre:v:20:y:2014:i:3:p:259-267 is not listed on IDEAS
    6. Ichiro Iwasaki & Akira Uegaki, 2017. "Central Bank Independence and Inflation in Transition Economies: A Comparative Meta-Analysis with Developed and Developing Economies," Eastern European Economics, Taylor & Francis Journals, vol. 55(3), pages 197-235, May.
    7. Grégory Levieuge & Yannick Lucotte, 2014. "A Simple Empirical Measure of Central Banks' Conservatism," Southern Economic Journal, Southern Economic Association, vol. 81(2), pages 409-434, October.
    8. Paolo Canofari & Giovanni Bartolomeo & Giovanni Piersanti, 2014. "Theory and Practice of Contagion in Monetary Unions: Domino Effects in EMU Mediterranean Countries," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 20(3), pages 259-267, August.
    9. Cavoli, Tony & Wilson, John K., 2015. "Corruption, central bank (in)dependence and optimal monetary policy in a simple model," Journal of Policy Modeling, Elsevier, vol. 37(3), pages 501-509.
    10. Stefan Krause & Felix Rioja, 2006. "Financial Development and Monetary Policy Efficiency," Emory Economics 0613, Department of Economics, Emory University (Atlanta).
    11. Pierre L. Siklos, 2008. "Inflation Targeting Around the World," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 44(6), pages 17-37, November.
    12. 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.
    13. repec:kap:empiri:v:44:y:2017:i:2:d:10.1007_s10663-016-9316-8 is not listed on IDEAS
    14. 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.
    15. Diouf, Ibrahima & Pépin, Dominique, 2017. "Gender and central banking," Economic Modelling, Elsevier, vol. 61(C), pages 193-206.
    16. Chortareas, Georgios & Logothetis, Vassileios & Magkonis, Georgios & Zekente, Kalliopi-Maria, 2016. "The effect of banking supervision on central bank preferences: Evidence from panel data," Economics Letters, Elsevier, vol. 140(C), pages 11-13.
    17. Wai-Ching Poon & Gee-Kok Tong, 2009. "The feasibility of inflation targeting in Malaysia," Economics Bulletin, AccessEcon, vol. 29(2), pages 1035-1045.
    18. 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.
    19. 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.
    20. repec:eee:jebusi:v:92:y:2017:i:c:p:45-62 is not listed on IDEAS
    21. Diouf, Ibrahima & Pépin, Dominique, 2017. "Gender and central banking," Economic Modelling, Elsevier, vol. 61(C), pages 193-206.

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