Transitions between monetary policy frameworks and their effects on economic performance

• Published in: Economic modelling 2021-02, Vol.95, p.311-329
• Main Authors: Cobham, David, Song, Mengdi
• Format: Article
• Language: English
• Subjects: Difference-in-differences; Inflation targets; International trends; Monetary policy frameworks; Network effects; Regression to the mean
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2020.02.049

The widespread adoption of inflation targeting (IT) from the early 1990s led to investigations of its effect on macroeconomic performance (inflation and growth), with the emergence of a majority view that the effects were small for advanced countries but possibly larger for emerging economies. We revisit the issue, using a new de facto (rather than de jure) classification of monetary policy frameworks and employing the difference-in-differences approach with regression to the mean effects in order to deal with the problem of endogeneity. We find small effects for advanced countries but insignificant effects for emerging economies. We then question the nature of the mean to which regression occurs and suggest instead that there are strong international trend/network effects leading policymakers to make similar policy decisions (with similar macro outcomes) from within different frameworks. We also find IT has not affected macro performance in the period after the Global Financial Crisis. •We examine the macro impact of transitions between monetary policy frameworks.•We use a new, de facto rather than de jure, classification of monetary frameworks.•Using the DID approach, we find transitions between frameworks have little impact.•We suggest this reflects international trend/network effects in monetary policy.•Research should focus more on similar policy decisions within different frameworks.