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What drives the Choice of Money-based Targets in the World?

  • César Calderón
  • Klaus Schmidt-Hebbel

Money targeting (MT) was a highly popular monetary regime among central banks in both industrial and developing countries during the 1980s and 1990s. This paper presents a comprehensive empirical exploration of the possible explanations of why countries choose (and abandon) a MT regime. The paper uses a large world panel dataset for treatment and control country groups, applies five panel-data estimation techniques for discrete-choice dependent variables, and conducts robustness checks for different control groups and time periods. The paper’s evidence shows that the likelihood of having MT in place declines significantly and robustly with trade openness, financial development, a strong fiscal position, and monetary instability.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 479.

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Date of creation: Aug 2008
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Handle: RePEc:chb:bcchwp:479
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  1. Levine, Ross, 1996. "Financial development and economic growth : views and agenda," Policy Research Working Paper Series 1678, The World Bank.
  2. Frederic S. Mishkin & Klaus Schmidt-Hebbel D., 2006. "Monetary Policy Under Inflation Targeting: An Introduction," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 5-17, December.
  3. Stephen M. Goldfeld, 1976. "The Case of the Missing Money," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(3), pages 683-740.
  4. Ekaterini Kyriazidou, 1997. "Estimation of a Panel Data Sample Selection Model," Econometrica, Econometric Society, vol. 65(6), pages 1335-1364, November.
  5. Klaus Schmidt-Hebbel & Alejandro M. Werner, 2002. "Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate," JOURNAL OF LACEA ECONOMIA, LACEA - LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION.
  6. Pablo Emilio Guidotti & Jose De Gregorio, 1992. "Financial Development and Economic Growth," IMF Working Papers 92/101, International Monetary Fund.
  7. Arellano, Manuel & Honore, Bo, 2001. "Panel data models: some recent developments," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 5, chapter 53, pages 3229-3296 Elsevier.
  8. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Journal of Development Economics, Elsevier, vol. 66(2), pages 415-444, December.
  9. Fatás, Antonio & Mihov, Ilian & Rose, Andrew K., 2006. "Quantitative goals for monetary policy," Working Paper Series 0615, European Central Bank.
  10. Arellano, Manuel & Carrasco, Raquel, 2003. "Binary choice panel data models with predetermined variables," Journal of Econometrics, Elsevier, vol. 115(1), pages 125-157, July.
  11. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
  12. Frederic Mishkin & Klaus Schmidt-Hebbel, 2002. "A Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know?," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 4, pages 171-220 Central Bank of Chile.
  13. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  14. Eduardo Levy-Yeyati & Federico Sturzenegger, 2003. "To Float or to Fix: Evidence on the Impact of Exchange Rate Regimes on Growth," American Economic Review, American Economic Association, vol. 93(4), pages 1173-1193, September.
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