krause_05

Emory University
Department of Economics
Working Papers

Title: Institutions, Arrangements, and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis *

Number: 05-01

Author: Stefan Krause and Fabio Méndez

Issue Date: January 2005 (revised, April 2006)

Abstract: We study how important monetary, exchange-rate and fiscal arrangements are in determining the relative preferences of policy makers for inflation stability. We argue that focusing on policy intentions, represented by these preferences, constitutes a better way of evaluating policy behavior, instead of looking at inflation outcomes that may be unavoidable at times.
Using a panel of 34 countries over a period of 25 years we find that a high degree of preference for inflation stability is significantly correlated only with central bank independence and membership to the European Monetary Union for low inflation countries, whereas for high inflation countries, only strict or flexible inflation targeting is relevant for inflation stabilizing policies.
Finally, we find no robust evidence suggesting that either adopting an exchange rate anchor or employing fiscal policy contribute towards explaining an inflation averse behavior.

Title:	Institutions, Arrangements, and Preferences for Inflation Stability: Evidence and Lessons from a Panel Data Analysis *
Number:	05-01
Author:	Stefan Krause and Fabio Méndez
Issue Date:	January 2005 (revised, April 2006)
Abstract:	We study how important monetary, exchange-rate and fiscal arrangements are in determining the relative preferences of policy makers for inflation stability. We argue that focusing on policy intentions, represented by these preferences, constitutes a better way of evaluating policy behavior, instead of looking at inflation outcomes that may be unavoidable at times. Using a panel of 34 countries over a period of 25 years we find that a high degree of preference for inflation stability is significantly correlated only with central bank independence and membership to the European Monetary Union for low inflation countries, whereas for high inflation countries, only strict or flexible inflation targeting is relevant for inflation stabilizing policies. Finally, we find no robust evidence suggesting that either adopting an exchange rate anchor or employing fiscal policy contribute towards explaining an inflation averse behavior.

Journal of Macroeconomics, forthcoming

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