Surprising Similarities: Recent Monetary Regimes of Small Economies

Andy Rose’s paper provides important evidence on the impact on how monetary regimes fared during the recent global financial crisis. The paper has two basic results. First, it shows that the two monetary regimes, hard fixing and inflation targeting, have become surprisingly durable and were able to withstand the stress of the shocks from the global financial crisis. Before the global financial crisis, monetary regime changes were countercyclical, that is, switches in regimes occurred more often during bad times, and particularly when countries were hit by major crises. The response of hard fix and inflation targeting regimes did not display this countercyclical pattern because countries stuck with them in the aftermath of the global financial crisis, even in the face of huge negative shocks. This was especially true for the inflation targeting regime: Not one of the inflation targeting countries dropped this monetary regime, unless they dropped it to enter the euro zone, and the reasons for entering the euro zone had little to do with the success or lack of success of inflation targeting. Countries that dropped inflation targeting to adopt the euro did so to become more fully part of the European project, and this was a political decision not a monetary one. The second result in Rose’s paper is that from 2007–12 outcomes in terms of many macroeconomic variables were surprisingly similar for countries with hard fix and inflation targeting regimes, while outcomes for the regime he calls the sloppy center were quite different, particularly on the inflation front, where inflation performance was substantially worse. The empirical analysis is well done and pretty convincing and is not bizarre, at least to this monetary economist. But how should we interpret the evidence? Does it suggest that the monetary regime doesn’t matter? I will argue that the COmmenTaRY Surprising Similarities: Recent Monetary Regimes of Small Economies