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VoxEU Column Monetary Policy

Comprehensive monetary policy frameworks classification goes global

Monetary policy frameworks have evolved significantly around the world over the past four decades. This column introduces an updated, freely available, database of monetary policy frameworks, which now covers 179 countries/currency areas over the period 1974-2017. The classification covers both domestic and external monetary policy targets and both de jure and de facto targets. It makes possible for the first time a clear and detailed examination of the worldwide and regional trends in monetary policy frameworks since the Bretton Woods era, and provides a resource that can be used in a wide variety of research settings.

The Comprehensive Monetary Policy Frameworks (CMPF) project, initiated in 2018 with work on advanced and emerging economies (Cobham 2018), is now essentially complete. It provides a classification of 179 countries/currency areas for each year from 1974 to 2017 (to be updated in due course), excluding only very small countries (< 250,000 in population) and a few others for which relevant data and information are hard to obtain. It covers both domestic (money, inflation) and external (exchange rate) targets for monetary policy and takes account of both the announcement and the attainment of targets.

The classification is designed to provide a resource for researchers undertaking empirical analysis of monetary and macroeconomic issues, whether that involves identifying the trends over time in different groups or regions of countries or examining the operation and effects of particular monetary policy frameworks (MPFs) such as inflation targeting, or just taking account of the impact of different frameworks in investigations of, say, the effects of the global financial crisis. The classification data are freely available at https://monetaryframeworks.org/, where spreadsheets for the whole (global) sample or for specific regional groupings can be downloaded. There are also links to country pages which provide details of the developments in each country that underlie its particular classification, page references to the sources used – primarily the reports from the IMF’s regular Article IV consultations with its members – and links to a visualiser which generates graphs of the frameworks in each grouping, scaled by number of countries or GDP or population.

The classification shares the concern inspired by Calvo and Reinhart (2002) regarding what countries do as well as or rather than what they say (also highlighted in Reinhart and Rogoff’s (2004) and Levy Yeyati and Sturzenegger’s (2005) exchange rate regime classifications). However, it goes well beyond exchange rate regimes in its focus on domestic targets of monetary policy. It is therefore multi-dimensional and the frameworks identified cannot be ranged along a single dimension in the way that exchange rate regimes can (from rigidity to flexibility). Figure 1 shows the algorithm for classifying the most important target frameworks – money, exchange rate, and inflation – plus the most important non-target frameworks, that is discretion, divided as between unstructured, loosely structured, and well-structured on the basis of the coherence of the objectives and the effectiveness of the instruments of the monetary authorities. The classification also includes categories for exchange rate fixing, 1 currency boards, multiple direct controls (command economies), currency union membership, dollarisation/euroisation, and mixed targeting (targets for two or more out of money, exchange rate, and inflation). 2 The ‘full menu’ of 32 monetary policy frameworks can be aggregated into a smaller number of broader categories, focused on the variables targeted, on the one hand, or the degree of monetary control, on the other, as in Table 1, for example, or in other ways that researchers might choose for themselves.

Figure 1 Algorithm for the classification of the main monetary policy frameworks

Figure 1 Algorithm for the classification of the main monetary policy frameworks

Table 1 Two useful aggregations of monetary policy frameworks

Table 1 Two useful aggregations of monetary policy frameworks

Source: Cobham (2021).

Global trends

The completion of the exercise makes possible for the first time a full presentation of the global trends over the period since Bretton Woods. Figure 2 shows the trends in terms of the target variable aggregation. There has been a large decline over time in exchange rate fixing (ERFix) and exchange rate targeting (ERTs), from around half of the countries to around a quarter, with the change concentrated in the 1970s and 1980s. There is a large rise in loosely structured discretion (LSD) to around 45% of countries, a rise also concentrated in the first half of the period. And there is a growth of inflation targeting (ITs) from the early 1990s to nearly a quarter of all countries. Multiple direct controls (MDC) and unstructured discretion (UD) are important up to some point in the 1990s but decline strongly thereafter. Monetary targeting (MTs) is never very important, 3 while mixed targeting (MixedTs) is low-frequency, mainly undertaken by countries for short periods prior to adopting the euro (for which a number of different ‘Maastricht criteria’ had to be fulfilled). Figure 3 shows sustained falls in rudimentary and intermediate, and sustained rises in substantial and intensive, monetary control frameworks. All these broad trends were previously identified in advanced and, though less strongly, in emerging economies (Cobham 2021), and it is now clear that they can also be found at the wider global level.

Figure 2 Target variable aggregation, whole world

Figure 2 Target variable aggregation, whole world

Figure 3 Degree of control aggregation, whole world

Figure 3 Degree of control aggregation, whole world

Regional trends

Figures 4-9 show the trends on the target variable aggregation for six regional groupings: Middle East and North Africa (MENA), Latin America, Asia, Africa, Caribbean, and Other Europe plus Caucasus and Central Asia (OECCA, essentially Albania plus countries that came out of Yugoslavia and the USSR in the early 1990s). Given the somewhat arbitrary definitions of ‘emerging’ economies, these regional groupings include the emerging economies covered in previous work (Cobham 2021) as well as low income or developing economies. The figures show considerable differences between regions. Latin America and MENA represent in some respects the opposite ends of a spectrum: the former has a substantial move towards inflation targeting, while in the latter the largest element is exchange rate pegs (with a movement over time from exchange rate fixes to targets) and inflation targets are attempted, with short-lived success, only by Turkey. In between these two, Africa has a dominant element of loosely structured discretion (LSD), together with a lot of exchange rate fixes and a very small amount of inflation targets. Asia has a bit more inflation targets, some exchange rate fixes, and a lot of loosely structured discretion. The Caribbean is dominated by exchange rate fixes and targets, with inflation targets only in one country towards the end of the period. Finally, the OECCA group (where the large green X area indicates that nearly all of these were not separate countries before 1991) has a lot of discretion, some exchange rate fixes and targets, some use of another sovereign’s currency (UASC), and some inflation targets. Comparable figures for the degree of control aggregation (not shown here) indicate that in all groups there has been a move away from rudimentary and intermediate towards substantial and intensive monetary policy frameworks. By the end of the period Latin America has MPFs that are 50% substantial and 20% intensive; MENA 42% and 37%; Africa 68% and 3%; Asia 75% and 13%; Caribbean 71% and 29%; and OECCA 87% and 0%.

Figure 4 Target variable aggregation for Middle East and North Africa (MENA)

Figure 4 Target variable aggregation for Middle East and North Africa (MENA)

Figure 5 Target variable aggregation for Latin America

Figure 5 Target variable aggregation for Latin America

Figure 6 Target variable aggregation for Africa

Figure 6 Target variable aggregation for Africa

Figure 7 Target variable aggregation for Asia

Figure 7 Target variable aggregation for Asia

Figure 8 Target variable aggregation for Caribbean

Figure 8 Target variable aggregation for Caribbean

Figure 9 Target variable aggregation for Other Europe, Caucasus and Central Asia (OECCA)

Figure 9 Target variable aggregation for Other Europe, Caucasus and Central Asia (OECCA)

Policy implications

The classification provides an essential preliminary categorisation of how monetary policy is done in different countries and periods, which can contribute to the analysis of a range of policy issues. So far, the relevant research, discussed in more detail in Cobham (2022), has focused mainly on (a) the determinants of countries’ choices of monetary policy frameworks (Cobham and Song 2020), and (b) the inflation and growth performance associated with different frameworks (Cobham et al. 2022), in advanced and emerging economies. The former work has emphasised factors such as size, anchor networks, former colonial relationships, financial market development, and political arrangements. The latter has found that the differences between those monetary policy frameworks used more frequently in the later years – which typically have better performance than those more common in the earlier years – are in many cases smaller than might have been expected, in particular inflation targeting is not always superior to, for example, loosely structured discretion. 4 It has argued that while monetary policy frameworks provide the context for decision-making they do not determine individual decisions, such that similar decisions can be taken from within different frameworks and different decisions from within similar frameworks. Monetary authorities and economists therefore need to focus on the decision-making processes as well as on the choice of monetary policy framework.

Conclusion

The Comprehensive Monetary Policy Frameworks (CMPF) project now covers essentially the whole world from 1974 to 2017. It provides a unique dataset which is freely available to researchers at the website https://monetaryframeworks.org/ and will be updated in due course. Research that has already made use of the data has provided interesting findings with regard to both countries’ choice of frameworks and the relationships between frameworks and economic performance, at this stage for advanced and emerging economies only. There is plenty of scope for further work on low income and developing economies, where there are considerable differences between regions. The dataset should also constitute a useful resource for a much wider range of research.

References

Calvo, G and C Reinhart (2002), “Fear of floating”, Quarterly Journal of Economics 107: 379-408.

Cobham, D (2021), “A comprehensive classification of monetary policy frameworks for advanced and emerging economies”, Oxford Economic Papers 73(1): 2-26; earlier version (2018) MPRA paper no. 84737.

Cobham, D (2022), “Monetary policy frameworks since Bretton Woods, across the world and its regions”, SSRN paper no. 4216667.

Cobham, D, P Macmillan, C Mason and M Song (2022), “Economic performance under different monetary policy frameworks”, Journal of Policy Modeling 44(2): 431-49.

Cobham, D and M Song (2020), “How do countries choose their monetary policy frameworks?”, Journal of Policy Modeling 42(6): 1187-1207.

Levy-Yeyati, E. and F Sturzenegger (2005), “Classifying Exchange rate Regimes: Deeds vs. Words”, European Economic Review 49: 1603-35.

Reinhart, C and K Rogoff (2004), “The modern history of exchange rate arrangements: a reinterpretation”, Quarterly Journal of Economics 119: 1-48.

Footnotes

  1. Fixing involves a monetary authority setting the exchange rate, typically within very narrow margins, in a foreign exchange market that it dominates, whereas targeting involves a monetary authority using interest rates and communication as well as foreign exchange transactions to control the exchange rate, typically within wider margins, in an autonomous foreign exchange market.
  2. For full details see Cobham (2021).
  3. This is typically not because countries did not attempt it but because they did not succeed in attaining the targets consistently.
  4. Cobham (2022) contains some preliminary analysis of the economic performance under different monetary policy frameworks in the six regional groupings.

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