Inflation Targeting or Fear of Floating in Disguise: A Broader Perspective

Today many argue that there appears to be an epidemic case of “fear of floating”. Some have further claimed that credible inflation targeting – a popular regime choice today – and fear of floating are identical regimes. This paper takes a different view. We modify Calvo and Reinhart’s (2002) approach to analyze the behavior of exchange rates, reserves, interest rates and inflation across 88 exchange rate regimes for 20 countries. We find that inflation targeting is empirically distinguishable from fixed, floating, managed floating, and fear of floating regimes. Credible inflation targeting appears to be more similar to floating and managed floating than to fixing or fear of floating. Being able to identify these regimes accurately allows one to distinguish between cases where countries claim to inflation target but actually fear of float. JEL Classification: E52 – Monetary Policy (Targets, Effects and Instruments), E58 – Central Banks and Their Policies, F41 – Open Economy Macroeconomic Aspects of International Trade and Finance, F31 – Foreign Exchange