The monetary-policy regime and the development in central macroeconomic variables in the OECD countries 1970-2005

The impact on central macroeconomic variables of changes in the monetary- policy regime in the OECD countries in the period 1970-2005 is estimated using the difference-in-difference method. We find that both shifts to a fixed-exchange-rate policy and to inflation targeting have led to a decline in inflation beyond the global trend in the ensuing years. Furthermore, we find a significant reduction in the volatilities in both inflation and the output-gap, beyond the global trend, after the adoption of a consistent fixed-exchange-rate policy, while no such effect can be found from a move to inflation targeting. The results are robust to several changes in the classification of the individual countries. In important respects, the results are at odds with recent literature on monetary policy and inflation targeting. This raises some questions: Does the exchange rate, in practice, absorb or create shocks? Should the role of fiscal policy be reconsidered? Are the concepts of robustness and optimality inadequately mixed? The answers can hopefully be found via future research.