Is Old Money Better than New? Duration and Monetary Regimes

Ilian Mihov,Andrew K. Rose

doi:10.5018/economics-ejournal.ja.2008-13

Abstract

Abstract We compare the duration and performance of different monetary regimes, especially the contrast between countries those that fix exchange rates and those that target inflation. Inflation targeting is a more durable policy; no country has yet been forced to abandon an inflation target, while many have abandoned fixed exchange rates. Indeed, even though inflation targeting began only in 1990, the duration of inflation targeting regimes is at least as long as, or longer than all alternative monetary regimes for comparable countries. Regime duration also matters in monetary policy; older regimes are typically more successful than younger ones in achieving low inflation.

Highlights

Old things often tend to be better than new
Time is a good filter for monetary regimes, and inflation targeting has far shown itself to be the regime most likely to pass the test of time
In order to illustrate the link between durations and success in achieving low inflation graphically, in Figure 3 we report the evolution of success in achieving inflation between 0% and 4% for both inflation targeters and for countries with fixed exchange rates

Summary

A More Rigorous Approach

If we see a country adopting a fixed exchange rate and we do not know whether it will survive or not in the following few years, Figure 4 provides a better estimate of the expected success rate in attaining low inflation. To conserve space we report only the coefficient estimates for the durations of inflation targeting and fixed exchange rate regimes (the two most important and common monetary regimes). Re-estimating all specifications from Table 4 or from Panel A of Table 5 by using the Reinhart-Rogoff classification produces highly significant coefficients on the variables capturing duration of inflation targeting and duration of fixed exchange rate regimes. Mark, but they are still quite statistically significant. The final two columns report estimates for the duration of any regime

A Forecasting Approach

Findings

Conclusion