A Presence of Absence: The Benign Emergence of Monetary Stability

Using a panel of over 200 countries and 30 years of annual data since 1990, we find evidence of increasing durability in national monetary regimes. There are now three types of long-lived monetary systems. There have long been stable multilateral currency unions in the developing world, most notably in the Caribbean and both Western and Central Africa; the advent of EMU has (re-)introduced monetary union to the rich countries of Western Europe. A large number of mostly small countries continue to have durably fixed exchange rates. Most dramatically, inflation-targeting has emerged as a third stable monetary regime. We document the decline in monetary instability across countries and discuss some of the slowly evolving causes. Rising monetary stability and the spread of inflation targeting has had benign consequences for business cycles, inflation, real exchange rate volatility, openness, and the incidence of financial crises.