New CEPR Policy Insight - Inflation Targeting is Eradicating International Financial Crises in the iPhone era
In 2007 CEPR launched the outstanding Policy Insight series: tightly argued policy essays, allowing researchers to present the policy implications of their work and others to an audience of fellow economists and policymakers across the world of government and private organisations. The first paper published was by Andrew K. Rose, Research Fellow at CEPR, and Dean of the National University of Singapore Business School, and now, to mark the occasion of reaching Policy Insight 100, we are very pleased that he has agreed to revisit and update his thoughts on Inflation Targeting, the subject of Policy Insight 1.
Despite initial doubts, Inflation Targeting (IT) has spread worldwide, proving sceptics wrong, and is now practised in over 60 countries, which collectively produce two-thirds of global output. Before IT, the regional waves of international financial crises were a perennial plague. The onset of IT has made such crises an area of only academic interest.
In this CEPR Policy Insight ‘iPhones, iCrises and iTargets: Inflation Targeting is eradicating International Financial Crises in the iPhone era’, Rose evaluates why Inflation Targeting has seen such global success, compares the status quo to his 2007 CEPR Policy Insight on IT, and discusses why the most attractive and remarkable feature of IT is its durability - especially after being robustly tested in the last decade by global catastrophes.
In his 2007 paper, Andrew Rose listed 27 countries that had adopted IT. Since then, over 20 more countries have started, with some large and notable entrants: India, Japan, Russia, and the United States. IT is almost universal: it now covers 35 of the 36 OECD members, 97.8% of the MSCI Developed Markets Index, 17 of the G20, and many emerging markets are starting to pursue Inflation Targeting.
“No other substantive area of economic policy has such uniformity across countries. Almost all Inflation Targeters have similar inflation mandates and targets, floating exchange rates, accessible inflation forecasts, independent central banks, and significant accountability”
Are international financial crises a thing of the past?
The international financial system has become more stable in the critical sense that there are a declining number of currency crashes. Yet as a system, it has simultaneously shown considerable and rising capacity to accommodate imbalances of savings and investment. While financial stability is not guaranteed by IT; banking, housing, sovereign debt, and security market crises continue, IT is continuing to evolve, and has become more flexible (to account explicitly for the business cycle), and more tuned to financial stability.
Before his 2007 paper, few countries who had adopted Inflation Targeting had been sorely tested - now they have. While countries experienced the Global Financial Crash differently, it is significant that no Inflation Targeter changed its monetary regime. The same is true of the Euro Crisis, and the ongoing COVID-19 pandemic. In not one case has there been any widespread outbreak of capital controls, either absolute or in comparison to protectionism on goods. While inflation targeting does not guarantee a placid macroeconomy, nevertheless, it is remarkable that none of these crises have threatened the underlying monetary policy framework of Inflation Targeting.
“It is hard to imagine that COVID-19 will shift countries away from IT. Few trusted frameworks will be discarded during a period of such uncertainty, when the public craves stability and stable inflation expectations are likely to help the fiscal authorities handle the enormous increase in public sector liabilities coming from pandemic relief.
The extraordinary nature of the pandemic has temporarily created the circumstances for experiments like helicopter money and mass monetisation, but these are likely to be facilitated by a stable long-run framework of IT”
Inflation Targeting has shown remarkable resilience, popularity, and effectiveness since its inception. Its use as the favoured global monetary framework is no longer in doubt, while robust testing of its performance over the last decade have further cemented its reputation. As the author notes, its durability and flexibility could just mean that no one has proposed a better monetary framework than Inflation Targeting simply because there isn’t one.
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You are invited to a CEPR webinar on:
Inflation Targeting: The Monetary Vaccine?
Join us on Wednesday 13 May 2020
10:00-11:00 (BST, London), 11:00 - 12:00 (CST)
Andy K Rose, Dean, NUS Business School and CEPR
Lars E O Svensson, Stockholm School of Economics and CEPR
Tim Phillips, CEPR
In this webinar, Andrew Rose presents CEPR Policy Insight 100, where he revisits Inflation Targeting and examines how it has withstood the test of time. Lars Svensson, former Deputy Governor of the Sveriges Riksbank, will join the discussion and consider Inflation Targeting in the new world of Covid-19.