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The Consolidation of the Anglo-Saxon/European Consensus on Price Stability - From International Coordination to a Rule-Based Monetary Regime

  • Arie Krampf
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    During the 1990s, a consensus consolidated among policy makers and economists worldwide regarding the desirability of very low inflation targeting. So far, this process has been explained on the basis of a domestic-functional thesis, according to which commitment to very low inflation provides local economic gains with no costs. In this paper, I present an alternative explanation, according to which the global norm of very low inflation targeting was consolidated as a political solution to the problem of exchange rate misalignment and volatility. I argue that policy makers in Germany and the US believed that convergence of monetary policies and inflation rates, in addition to liberalization of financial markets, will stabilize exchange rates without the need for direct coordination. The paper employs the theory of liberal intergovernmentalism as a benchmark to explain the choice of the European and the G-5/7 countries to establish a low-inflation rule-based international monetary regime. The paper concludes that the regime of very low inflation targeting was consolidated as a politically viable solution to a political problem rather than as an economic best practice. Furthermore, it concludes that the norm of very low inflation targeting was a corer solution that neglected the problem of exchange rate stability.

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    Paper provided by Free University Berlin in its series KFG Working Papers with number p0047.

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    Date of creation: 29 Oct 2012
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    Handle: RePEc:erp:kfgxxx:p0047
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    1. Kenneth Rogoff, 2002. "Dornbusch’s Overshooting Model After Twenty-Five Years," IMF Working Papers 02/39, International Monetary Fund.
    2. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(2), pages 151-62, May.
    3. William H. Branson & Jacob A. Frenkel & Morris Goldstein, 1990. "International Policy Coordination and Exchange Rate Fluctuations," NBER Books, National Bureau of Economic Research, Inc, number bran90-1, July.
    4. Feldstein, Martin S, 1988. "Distinguished Lecture on Economics in Government: Thinking about International Economic Coordination," Journal of Economic Perspectives, American Economic Association, vol. 2(2), pages 3-13, Spring.
    5. Jacob A. Frenkel, 1983. "Exchange Rates and International Macroeconomics," NBER Books, National Bureau of Economic Research, Inc, number fren83-1, July.
    6. Jacob A. Frenkel & Morris Goldstein & Paul R. Masson, 1989. "International dimensions of monetary policy: coordination versus autonomy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 183-243.
    7. Paul R. Masson & Morris Goldstein & Jacob A. Frenkel, 1991. "Characteristics of a Successful Exchange Rate System," IMF Occasional Papers 82, International Monetary Fund.
    8. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
    9. Jacob A. Frenkel, 1983. "An Introduction to Exchange Rates and International Macroeconomics," NBER Chapters, in: Exchange Rates and International Macroeconomics, pages 1-18 National Bureau of Economic Research, Inc.
    10. William J. McDonough, 1997. "A framework for the pursuit of price stability," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 1-7.
    11. Putnam, Robert D., 1988. "Diplomacy and domestic politics: the logic of two-level games," International Organization, Cambridge University Press, vol. 42(03), pages 427-460, June.
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