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

  • Krause, Stefan
  • Méndez, Fabio

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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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 1 (March)
Pages: 282-307

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:1:p:282-307
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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