May 2020

iPhones, iCrises and iTargets: Inflation Targeting is eradicating International Financial Crises in the iPhone era

Andrew K. Rose National University of Singapore Business School and CEPR

In June 2007, the Centre for Economic Policy Research issued my Are International Financial Crises a Barbarous Relic? Inflation Targeting as a Monetary Vaccine, as Policy Insight number one. Far more importantly, the first iPhone was released. The iPhone has stood the test of time well; over two billion have been sold, and Apple became the first trillion-dollar company. Inflation targeting has stood up just as well. Almost no one has experienced an international financial crisis on an iPhone, because of inflation targeting; currency crises have been crushed! CEPR POLICY INSIGHT No. INSIGHT POLICY 100CEPR CEPR POLICY INSIGHT No. 100 May 2020 02 and Singapore have Denmark envy?). Seventeen of the G20 are inflation targeters. inflation are G20 of envy?). the Seventeen have Denmark Singapore and Denmark?), 97.8% (perhaps Index Hongit, and Kong Markets Developed MSCI of the It ubiquitous. 36 is 35 of the now OECD IT (what covers members point, about this At Ground Zero 2 1 States. United the and Russia, Japan, big: India, are some entrants of the And Zambia. to through Albania from ranging have started, more countries over IT. twenty then, adopted Since had that countries 27 listed In I my 2007 paper spread. to continued has targeting Inflation The Sincerest Form of Flattery. yes! scream: data of more years relic? Thirteen abarbarous crises financial international making vaccine” a “monetary targeting inflation is hindsight, of benefit the with So, 1) (Table tablesimplein a (IT) targeting of inflation system modern the in those to rates exchange thefixed of of 1959-1971 period features Bretton Woods fifteen I compared Since you asked: Argentina, China,andSaudi Arabia. Joanna Niedzwiedzinska provides agoodrecent survey inInflation Targeting (NBPWorking Paper No. 299). International Monetary Fund. In short, it is the diametric opposite of the postwar system; system; reversed.” Woods, postwar Bretton the of opposite diametric the is it short, In Fund. Monetary International the or gold, States, United the for role central a have not does It planned. formally not was mobility capital and rates exchange now floating with policy it monetary spread; of domestically-oriented to continued has targeting of as as well the OECD. system chunk a The large countries inflation of developing a number includes success, manifest its of result a As counterparts. their than flows fewer capital and of stops” “sudden volatility rate exchange lower experience inflation target that Countries costs. But doesthe focus not of domestic targeting seem inflation to international have observable regime. an inflation-targeting to has forced ever abandon been No country the alternatives. with by wayof contrast especially durable, remarkably seems targeting inflation interests, with national is aligned policy the of goal Because monetary flows intervention. and without often capital on controls without usually float, rates exchange their let targeters Inflation to target. inflation independence adomestic the pursue banks emerged. central their has granted have trend new countries a of number however, increasing 1990, An Since strategies. hybrid or ill-defined boards, and unions monetary targets, many growth – money seen strategies other with have that experimenting decades nations choice a past – the reaction, rate In crises. exchange rate fixed exchange a produced to of frequently policy number monetary large a their hitch Historically to strategy. chose countries monetary their for choices few have Countries … wrong. are They return. will days old bad the that and luck, good merely is this believe Some stability. of oasis an been has system financial international the 2001, in Thailand 1994, in Mexico 1992, 1997,in RussiaUK in 1998, BrazilThe in 1999 …the listhistory. is long. Yet of since the collapsedust-bin of Argentina the in into fall policies rate exchange fixed their witnessed and speculators large by poor, attacked and currency rich their saw small, Countries and crises. financial international by plagued were 1990s “The PAPER IWROTE: 2007 MY IN 1

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CEPR POLICY INSIGHT No. 100 May 2020 03 Table 1 Table target inflation. to have begun not yet nine only Index, Markets Emerging MSCI the in economies the 26 of developing targeting; inflation pursue also markets emerging Many independence of the central bank; everything unravelled quickly as monetary monetary as quickly unravelled everything bank; central ofindependence the raised and arrogant grew of However,operation. thegovernment year first its in successful be to seemed and appeal mainstream of its because adopted was IT that – argues time at the bank central of the governor –the Sturzenegger Federico (most crisis, the recent) Argentine of survey (yet) an(other) excellent his In coincident with programme. IMF target, base amonetary to IT from switched 2018 Argentina October in announcement, formal its from two years just foraylasting unsuccessful an After in duress. targeting inflation out of crash to country only the it is rule; the proves that exception the is Argentina output. of global two-thirds produce collectively which countries over sixty in practised is IT point, this 1.At Figure in portrayed is triumph away; its sceptics the swept Yet has IT hidebound. on being itself prides that profession aconservative is banking Central 3 target inflation. Turkey and now Brazil, Russia, Korea, Indonesia, Thailand, Mexico, Sweden, UK, the jumped: –have all collapsed regimes when their 1990s the price in the paid rate –and 1 15 14 13 12 11 10 9 8 7 6 5 4 3 2 The outliers are Argentina, China,Egypt, Malaysia, Pakistan, Qatar, Saudi Arabia, Taiwan andUAE. Alignment withAcademics Transparency Central Banks Key Members Role of USasCentre Country Role of Gold Role of IMF International Cooperation System Design Current Account Imbalance Capacity Capital Mobility Intermediate Target Focus of Monetary Policy Exchange Rate Regime Regime Durability

3 The countries that conspicuously attempted to fix their exchange exchange their fix to attempted conspicuously that The countries Features of International Monetary Systems Features Monetary of International the inflation target in December 2017,December in the target undermining inflation the Bretton Woods Large, Northern Key inprinciple Key inprinciple Exchange Rate Unaccountable Key inpractice Partly/Wholly International Dependent, Necessary Controlled Planned Limited Fixed Low Low Low None/Inflation Forecast Relatively unrestricted Inflation Targeting Wholly Domestic often small Independent, Not required Accountable OECD/LDCs, Unplanned Negligible Floating Small Small High High High High CEPR POLICY INSIGHT No. 100 May 2020 04 Figure 1 failure. a monetary than wound fiscal a self-inflicted more seems This shocks. of negative aperiod before immediately lost was credibility 6 5 4 Crisis”. “Currency and Crisis” Financial “International for both searches Google in decline the demonstrate to Trends data of Google span full the 3 uses Figure waned. correspondingly has crises in interest fallen, has crises financial number of international the As (GFC) downward. clearly is of 2008-09, trend the Crisis Financial theGlobal like clusters recent identifiable acouple easily are there While decades. four 2 for last the Figure in plotted is crash” a “currency experiencing (meaning no) The number of countries academic of only interest. area an crises such made them). has of IT who studied of The us onset (though by those appreciated plague perennial a were crises financial of international waves IT,Before regional the Crisis? Who’s Afraid of theBig Bad International Financial Anti-trust? markets? Housing?Procurement? Labour management? Debt on taxation? of policy one same say the Can accountability. andsignificant banks, independent central forecasts, inflation accessible rates, exchange floating targets, and mandates inflation have similar targeters inflation all Almost countries. across uniformity such has policy of economic area substantive No noteworthy. other also is commonality its commonplace; not only is IT

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CEPR POLICY INSIGHT No. 100 May 2020 07 global crises such as the GFC and the COVID-19 the pandemic. GFC and the as such crises global to response policy international an coordinating and facilitating dollars, to lines swap via access foreign provides times bad in and of US form treasuries, the in assets safe issues The US currently role States. United of the special the Imissed piece, earlier In my country. indispensable the the remains US firefighter, the is IMF But the if future. for foreseeable the haveof plenty business will IMF the crises; currency are crises all GDP. of global not apercentage as course, Of credit of IMF use the 5plots role; Figure Fund’s the has so of IT), (with advance the slowly diminish handle to tasked it is crises As the some of scene. financial international the of firefighter the remains The IMF crises. financial international have not experienced stresses non-economic and economic severe experiencing countries IT that stressing worth it is (at yet). again, least And targeting of inflation framework policy monetary underlying the have threatened crises these not does targeting inflation So, COVID-19 of the pandemic. midst the in this too; Iwrite hit shocks Other crises. Euro GFC and the of IT; era the witness through continue crises market security and debt, sovereign housing, by IT. Banking, NOT guaranteed is – system financial domestic of the stability Imean – by which stability Financial Meanwhile, back atHQ Figure 5 0 .02 .04 .06 .08 .1 1 9 guarantee a placid macroeconomy. Nevertheless, it is remarkable that none of that remarkable it is Nevertheless, macroeconomy. aplacid guarantee 9 S 0 t a

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A G r g e D n t i P n a 2 0 2 0 CEPR POLICY INSIGHT No. 100 May 2020 08 simply because there isn’tsimply because one. targeting inflation than framework monetary abetter proposed no one has that mean just could …). resilience and Hong Its durability Bulgaria, Kong, (Denmark, rate exchange of afixed rigors the endure to willing country you’re if not asmall town it’sthe only Indeed, town. in games is the one few of targeting Inflation discarded. being framework targeting inflation the imagine to hard is it raised, are targets inflation but if even war; with associated debt government in increases thelarge followed often has inflation of IT. long-run Historically, framework by astable facilitated be to likely are these but monetisation, mass and money helicopter like experiments for circumstances the created temporarily has pandemic of the nature The extraordinary relief. pandemic from coming liabilities in public sector increase the enormous handle authorities fiscal to thehelp likely are expectations For inflation stability. public another, stable craves when the of uncertainty, such aperiod during discarded be will frameworks trusted few IT. away from For one countries thing, shift COVID-19 will that imagine to It hard is money growth. target few and country any by adopted hasn’t been targeting income Nominal anathema. seem major changes shocks)unpopular; bad proved after inflation for above-average allow to line sloped along apositively targeting price-level to (such ashift as shifts ButGFC. minor even the since experienced pressures deflationary the handling to adrift be to seemed there COVID-19the pandemic, Before stability. cycle), financial to business more tuned and the for explicitly more flexible become account It has (to tweaked. be to continues IT anti-vaxxers. fewer …and crises fewer be will there over time work, to tend (my one, president sometimes). is ‘anti-vaxxers’ vaccines But are There continue. since will crises financial international vaccine, is a monetary targeting Even inflation if It Takes anIdea to Beat IT game in in game CEPR POLICY INSIGHT No. 100 May 2020 09 Rose was the Managing Editor of the of the Editor Managing the was Rose awards. teaching two won has he received has and macroeconomics, and more than 30,000 citations. His teaching is in the areas of finance, international macroeconomics; trade, international in issues addresses Aviv, INSEAD, London School of Economics, and the European University Institute. University Stockholm,Tel European the and Princeton, Economics, of School United London including Aviv, INSEAD, the universities, and other of Spain, number a Singapore, visited has Zealand, He New States. Netherlands, Japan, Israel, Kong, Hong Europe, Canada, Australia, of: banks central the and Finance; of Department Canadian the (UK), Treasury HM Treasury, of Department US the including: agencies, national of number a at five worked also has He Bank. on Development Asian the and worked Bank, World the Fund, has Monetary He phenomena. the International international including: work agencies, economic his world” of at and international a number of continents “real most by and driven policy, and economic of applied practice is and theory the in interested is Rose conferences. academic forty-five over organised has He Singapore. of University National the at Institute Management Risk the and and Haas at Policy Business International for Center Clausen the of Director founding the was and 2001, of Economics cnmc junl, mn te the them among journals, economics refereed in articles eighty including papers, fifty and hundred one over published has Rose Toronto. of University College, Trinity BA from his and Oxford, of University Nuffield College, from MPhil his Technology, of Institute Massachusetts the from PhD He his received Research. Economic and Finance of Bureau Asian the of Fellow Research Senior a and a Fellow, CEPR Research Research, of Economic Bureau of the National Associate Research a is He Berkeley. California, of University the at Business of School Haas Group, Policy and Analysis Economic the in Business International of B.T. Professor Jr the was Rocca he that is KRose DeanAndrew of the National University of Singapore Business School. Prior to AUTHOR THE ABOUT Hélène Ugo Presidents Vice Philippe President President Honorary and Founder Board the of Chair CEPR. those of not and authors the of those are report this in expressed opinions The its to publications. review prior give not do Centre the research of Trustees the CEPR but society.policy, on views civil include frommay drawn perspectives of as spectrum well broad a as reflects viewpoints output individual its researchers, of network large a Because such on and publications. draws of it matters sales and policy Members economic Institutional its on from comes stand funding core its institutional no and takes public It all of groups. independent interest is CEPR private 1983, in founded was it since Panizzacharity registered A relevance’. policy with excellence ‘Research is principle guiding CEPR’s makers. research 1,500 of key into the hands results decision- to the and policy-relevant get research, over world-class of network a to promote is is twofold: goal Centre’s The universities. (CEPR) in European mostly based economists Research Policy Economic for Centre The RESEARCH POLICY ECONOMIC FOR CENTRE THE Rey Martin , the the , Review of Economic Studies Economic of Review Journal of International Economics American Economic Review Maristella Botticini Botticini Maristella Mauro di Weder Beatrice Portes Richard Bean Charlie Sir , and the the and , Journal of Finance of Journal

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from 1995 through through 1995 from Quarterly Journal Journal Quarterly . His research research His .