Working Paper: CEPR ID: DP9684
Authors: Andrew K. Rose
Abstract: In contrast to earlier recessions, the monetary regimes of many small economies have not changed in the aftermath of the global financial crisis. This is due in part to the fact that many small economies continue to use hard exchange rate fixes, a reasonably durable regime. However, most of the new stability is due to countries that float with an inflation target. Though a few have left to join the Eurozone, no country has yet abandoned an inflation targeting regime under duress. Inflation targeting now represents a serious alternative to a hard exchange rate fix for small economies seeking monetary stability. Are there important differences between the economic outcomes of the two stable regimes? I examine a panel of annual data from more than 170 countries from 2007 through 2012 and find that the macroeconomic and financial consequences of regime-choice are surprisingly small. Consistent with the literature, business cycles, capital flows, and other phenomena for hard fixers have been similar to those for inflation targeters during the Global Financial Crisis and its aftermath.
Keywords: Crisis; Data; Empirical; Exchange Rate; Financial; Float; Hard Fix; Inflation; Panel; Recession; Target
JEL Codes: E58; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary regimes (hard fixed exchange rates) (F33) | Macroeconomic outcomes (business cycles, capital flows, inflation) (E39) |
| Monetary regimes (inflation targeting) (E52) | Macroeconomic outcomes (business cycles, capital flows, inflation) (E39) |
| Monetary regimes (inflation targeting) (E52) | Net capital flows (F21) |
| Macroeconomic outcomes (business cycles, capital flows, inflation) (E39) | Economic performance (GDP growth, inflation rates) (O57) |