Working Paper: NBER ID: w12711
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 been forced to abandon an inflation-targeting regime. Succinctly, it is the diametric opposite of the post-war system; Bretton Woods, reversed.
Keywords: Inflation Targeting; International Monetary System; Exchange Rate Volatility; Capital Flows
JEL Codes: F02; F33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation Targeting (IT) (E52) | Lower Exchange Rate Volatility (F31) |
| Inflation Targeting (IT) (E52) | No Significant Difference in Current Account Imbalances (F32) |
| Inflation Targeting (IT) (E52) | No Significant Difference in Reserve Levels (Q31) |
| Inflation Targeting (IT) (E52) | Lower Frequency of Sudden Stops in Capital Flows (F32) |