Understanding and Predicting Monetary Policy Framework Choice

Sullivan, Megan (2023): Understanding and Predicting Monetary Policy Framework Choice.

Abstract

This paper investigates the determinants of countries’ choice of monetary policy frameworks (MPF) for emerging and developing countries. Countries make different MPF choices and we think it is because they have different country-level characteristics (e.g. democratic strength and trade networks). By covering 87 countries from 1985-2017, we investigate the role these characteristics play in predicting MPF choice. A highlight of this paper is that it uses a tailored variable to measure the volume of trade with a network that pegs to an anchor currency. We find that a country is significantly more likely to choose an exchange rate MPF when the volume increases. The model used in this paper correctly predicts 74% of MPF choice when done via a cross-validation method. This paper enables policymakers to see which MPF countries similar to their own have chosen, and they can decide if it is suitable for them, too.

• Item Type: MPRA Paper
• Language: English
• Keywords: monetary policy frameworks; trade networks; inflation targets; exchange rate targets; discretion; central bank independence
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F40 - General

References

Alexander, W., Balin ̃o, T. and Enoch, C. (1995), ‘The adoption of indirect instruments of monetary policy’, IMF Occasional Paper 126.

Batini, N. and Laxton, D. (2006), Under What Conditions Can Inflation Targeting Be Adopted? The Experience of Emerging Markets, Working Papers Central Bank of Chile 406, Central Bank of Chile.

Bekaert, G., Harvey, C. and Lundblad, R. (2006), ‘Growth volatility and financial liberalization’, Journal of International Money and Finance, 25, 370-403.

Bellemare, M., Masaki, T. and Pepinksy, T. (2017), ‘Lagged explanatory variables and the estimation of causal effect’, The journal of politics, 79(3).

Bowdler, C. and Nunziata, L. (2006), ‘Trade openness and inflation episodes in the oecd’, Journal of Money, Credit and Banking, 8(2), 553-563.

Breedon, F., P ́etursson, T. and Rose, A. (2012), ‘Exchange rate policy in small rich economies’, Open Economies Review, 23(3), 421-445.

Chinn, D. M. and Ito, H. (2008), ‘A new measure of financial openness’, Journal of Comparative Policy Analysis 10(3), 309–322.

Cobham, D. (2011), Monetary policy architecture, financial institutions and financial markets in the middle east and north africa: An overview, in D. Cobham and G. Dibeh, eds, ‘Money in the Middle East and North Africa: Monetary policy frameworks and strategies.’, London: Routledge.

Cobham, D. (2021), ‘A comprehensive classification of monetary policy frameworks in advanced and emerging economies’, Oxford Economic Papers 73(1), 2–26.

Cobham, D. (2022), ‘Monetary policy frameworks in the middle east and north africa: How do they compare with other groupings?’, Scottish Journal of Political Economy, 69(1), 108-130.

Cobham, D. (2023), ‘A partial disaggregation of the loosely structured discretion category in the comprehensive monetary policy frameworks classification’, Available at SSRN: https://ssrn.com/abstract=4467150 or http://dx.doi.org/10.2139/ssrn.4467150.

Cobham, D. and Song, M. (2020), ‘How do countries choose their monetary policy frameworks?’, Journal of Policy Modeling 42(6), 1187–1207.

Debelle, G., Masson, P., Savastano, M. and Sharma, S. (1998), ‘Inflation targeting as a framework for monetary policy’, IMF - Economic Issues No.50.

Frankel, J. (2010), Monetary policy in emerging markets, in B. M. Friedman and M. Woodford, eds, ‘Handbook of Monetary Economics’, Elsevier, Oxford, chapter 25, pp. 1439–1520.

Frankema, E., Hillbom, E., Kufakurinani, U. and zu Selhausen, F. M. (2022), ‘The history of african development. an online textbook for a new generation of african students and teachers.’, African Economic History Network.

Garriga, A. (2016), ‘Central bank independence in the world: a new dataset’, Interna- tional Interactions 42(5), 849–868.

Jaggers, K. and Marshall, M. G. (2009), ‘’polity iv project: Dataset users manual’, . Center for Systemic Peace URL: http://www.systemicpeace.org/polityproject.html

Juhn, G. and Mauro, P. (2002), ‘Long-run determinants of exchange rate regimes: A simple sensitivity analysis’, IMF Working Papers, No. 02/104.

Khan, M. S. (2009), ‘Middle east and oil exporters’, The Euro at Ten: The Next Global Currency, 139-154.

Lane, P. (1997), ‘Inflation in open economies’, Journal of International Economics, 327- 347.

Levy Yeyati, E., Sturzenegger, F. and Reggio, I. (2010), ‘On the endogeneity of exchange rate regimes.’, European Economic Review 54(5), 659–677.

McKinnon, R. (1963), ‘Optimum currency areas’, American Economic Review, 53, 717- 725.

Meissner, C. M. and Oomes, N. (2009), ‘Why do countries peg the way they peg? the determinants of anchor currency choice.’, Journal of International Money and Finance 28(3), 522–547.

Mishkin, F. (2004), ‘Can inflation targetting work in emerging market countries?’, NBER Working Paper, 10646.

Mishkin, F. S. (1999), ‘International experiences with different monetary policy regimes’, Journal of Monetary Economics, 43(3), 579-605.

Mood, C. (2010), ‘Logistic regression: Why we cannot do what we think we can do, and what we can do about it.’, European Sociological Review, 26(1), 67-82.

Mundell, R. (1961), ‘Theory of optimum currency areas’, American Economic Review, 51(4),657-665.

Romer, D. (1993), ‘Openness and inflation: Theory and evidence’, Quarterly Journal of Economics, 108, 869-903.

Shambaugh, J. (2019), ‘Shambaugh exchange rate regime classification’. URL: https://iiep.gwu.edu/jay-c-shambaugh/data/

Steinberg, D. and Malhotra, K. (2014), ‘The effect of authoritarian regime type on exchange rate policy’, World politics, 66(3), 491-529.

Svirydzenka, K. (2016), ‘Introducing a new broad-based index of financial development.’, IMF Working Papers, No. 16/5.

Usman, Z. and Landry, D. (2021), ‘Economic diversification in africa and why it matters’, Carnegie Endowment for International Peace.