Working Paper: CEPR ID: DP5854
Authors: Andrew K. Rose
Abstract: A stable international monetary system has emerged since the early 1990s. A large number of industrial and a growing number of developing countries now have domestic inflation targets administered by independent and transparent central banks. These countries place few restrictions on capital mobility and allow their exchange rates to float. The domestic focus of monetary policy in these countries does not have any obvious international cost. Inflation targeters have lower exchange rate volatility and less frequent ?sudden stops? of capital flows than similar countries that do not target inflation. Inflation targeting countries also do not have current accounts or international reserves that look different from other countries. This system was not planned and does not rely on international coordination. There is no role for a center country, the IMF, or gold. It is durable; in contrast to other monetary regimes, no country has yet abandoned an inflation-targeting regime in crisis. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.
Keywords: capital controls; durable; exchange finance; fixed inflation rate; regime
JEL Codes: F02; F10; F34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation targeting countries (E31) | lower exchange rate volatility (F31) |
| inflation targeting countries (E31) | fewer sudden stops in capital inflows (F32) |
| inflation targeting (E31) | current account balances do not differ significantly (F32) |