International Experiences with Different Monetary Policy Regimes

Abstract

In recent years a growing consensus has emerged for price stability as the overriding, long-run goal of monetary policy.However, despite this consensus, the following question still remains: how should monetary policy be conducted to achieve the price stability goal?To shed light on this question, this paper examines the experience with different monetary policy regimes currently in use in a number of countries.A central feature of all of the monetary regimes discussed here is the use of a nominal anchor in some form, so first we will examine what role a nominal anchor plays in promoting price stability.Then we will examine 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 paper then concludes with an overall assessment of the different monetary regimes and draws some policy conclusions.The basic theme that comes out of this analysis is that the success of different monetary regimes depends on their ability to constrain discretionary policymaking so that long-run price stability is more likely to result. I. The Role of a Nominal AnchorA nominal anchor is a constraint on the value of domestic money, and in some form it is a necessary element in successful monetary policy regimes.Why is a nominal anchor needed?First, from a purely technical viewpoint, a nominal anchor provides conditions that make the price level uniquely determined, which is obviously necessary for price stability.Indeed, it helps promote price stability because it helps tie down inflation expectations directly through its constraint on the value of domestic money.However, a nominal anchor can be thought of more broadly as a constraint on discretionary policy that helps weaken the time-inconsistency problem described by Kydland and Prescott (1977), Calvo (1978) and Barro and Gordon (1983) so that in the long run, price stability is a more likely to be achieved.The time-inconsistency problem arises because there are incentives for a policymaker to pursue short-run objectives even though the result is poor long-run outcomes which result from

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