This paper examines the international experiences with four basic types of monetary policy regimes: 1) exchange-rate targeting, 2) monetary targeting, 3) inflation targeting, and 4) monetary policy with an implicit but not an explicit nominal anchor. The basic theme that emerges from this analysis is that transparency and accountability are crucial to constraining discretionary monetary policy so that it produces desirable long-run outcomes. Because the devil is in the details in achieving transparency and accountability, what strategy will work best in a country depends on its political, cultural and economic institutions, as well as on its past history.

In 2004 all publications will carry a motif taken from the €100 banknote. This paper can be downloaded without charge from

Short-term volatility in G3 bilateral exchange rates has been a fact of life since the beginning of the post-Bretton Woods float. It has been established, surprisingly, that this volatility is not only disproportionately large relative to the variation in relative macroeconomic fundamentals of Germany, Japan, and the United States, but is in fact largely unrelated to them. The apparent disconnect between fundamentals and dollar-yen and dollar-euro exchange rate fluctuations has led to perennial complaints about persistent exchange rate “misalignments,” and their real effects on the G3 (and other) economies, giving rise in turn to recurring proposals for government policies to limit this volatility. The idea that volatility reflects nothing more than the (perhaps rational, certainly profit-seeking) behavior of foreign exchange traders seems to give justification for a policy response. Yet, the disjunction between macroeconomic expectations and the volatility seems to indicate as well that some deviation from domestic monetary policy goals would be necessary to intervene against exchange rate swings. In fact, as demonstrated to most observers’ satisfaction in the instance of the ERM crises of 1992–1993, in a world of free movement of capital and domestic monetary policy autonomy (for the

those of the author(s) and do not necessarily reflect those of the John F. Kennedy

We estimate the output loss associated with deliberate disinflation – the sacrifice ratio – for six small open economies, through the simulation of estimated VAR models where the historical monetary policy has been identified. Compared to estimates of other studies, our estimated sacrifice ratios are quite low for Norway and Sweden, quite high for Canada and the Netherlands, and relatively precisely estimated. A low sacrifice ratio implies, ceteris paribus, that inflation can be stabilized within narrower bands for a given variability of output. Varying sacrifice ratios across inflation-targeting countries may suggest that the inflation-rate bandwidth should also vary.

The paper examines possible monetary policy strategies for Latin America that may help lock-in the gains in the fight against inflation attained by the region during the 1990s. Instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible, the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking. This focus suggests that there are three basic frameworks that deserve serious discussion as possible, long-run strategies for monetary policy in Latin America: a hard exchange-rate peg, monetary targeting, and inflation targeting. We look at the advantages and disadvantages of each of these strategies in light of the recent track record of monetary policy in several Latin American countries for clues as to which of the three strategies might be best suited to economies in the region.

This paper examines the information provided to the private sector by central banks. By using the principal component analysis, we investigated the variance of the procedural rules followed by nine major central banks about information treatments. We investigate problems related to the information coming from the central banks by focusing on the quantity and quality perspectives and highlight the methodological complexity of the investigation. We find that a synthetic quantitative index of transparency is not enough to represent the phenomenon since it can result misleading in understanding the behavior of institutionally different central banks associated with the same index values. Keywords: policy. Central bank transparency, principal components, monetary

The paper looks at the evolution of monetary policy in industrialized countries by evaluating two monetary policy strategies, monetary targeting and inflation targeting. The paper provides brief case studies of countries that have adopted these two strategies and draws a set of lessons. The experience with monetary targeting suggests that although it was successful in controlling inflation in Switzerland and especially Germany, the special conditions in those two countries that made it work reasonably well are unlikely to be satisfied elsewhere. Inflation targeting therefore is more likely to lead to better economic performance for countries that choose to have an independent domestic monetary policy. Nevertheless, there are subtleties in how inflation targeting is conducted and the lessons from the industrialized countries examined in this paper will hopefully be of use to central banks designing their monetary policy framework.

exclusively those of the authors and not those of Columbia University, the National Bureau of

Inflation targeting has become an increasingly global framework, used by countries of many different types and in all the continents of the world. To assess its global contribution, this paper uses one of the broadest ever surveys of monetary policy frameworks to construct an overall picture from the individual jigsaw pieces of country frameworks. The jigsaw is made up of targets and other measures of policy reaction, institutional characteristics such as independence, accountability and transparency, and analytical capacities within the central bank. The paper notes that the use of inflation targets has spread very rapidly in the 1990s, far more so than has the number of “inflation targeting ” frameworks. The analysis focuses on the flexible use of inflation (and money) targets, and how these relate to indicators of central bank reaction functions, independence, accountability, transparency, and analytical methods. The use of targets appears to have built a strong momentum towards the explanation of policy, and the use of inflation targets in particular has provided a vehicle for communication between central banks and governments and the private sector.