Skip to main content
    • Aa
    • Aa

The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence

  • J. Lawrence Broz (a1) and Michael Plouffe (a2)

Analyses of monetary policy posit that exchange-rate pegs, inflation targets, and central bank independence can help anchor private-sector inflation expectations. Yet there are few direct tests of this argument. We offer cross-national, micro-level evidence on the effectiveness of monetary anchors in controlling private-sector inflation concerns. Using firm-level data from eighty-one countries (approximately 10,000 firms), we find evidence that “international” anchors (exchange-rate commitments) correlate significantly with a substantial reduction in private-sector concerns about inflation while “domestic” anchors (inflation targeting and central bank independence) do not. Our conjecture is that private-sector inflation expectations are more responsive to exchange-rate anchors because they are more transparent, more constraining, and more costly than domestic anchoring arrangements.

Hide All
Alesina Alberto, and Summers Lawrence H.. 1993. Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence. Journal of Money, Credit, and Banking 25 (2):151–62.
Ammer John, and Freeman Richard T.. 1995. Inflation Targeting in the 1990s: The Experiences of New Zealand, Canada, and the United Kingdom. Journal of Economics and Business 47 (2):165–92.
Atkenson Andrew, and Kehoe Patrick J.. 2001. The Advantage of Transparent Instruments of Monetary Policy. NBER Working Paper No. 8681. Cambridge, Mass: National Bureau of Economic Research.
Ball Laurence, and Sheridan Niamh. 2005. Does Inflation Targeting Matter? In The Inflation-Targeting Debate, edited by Bernanke Ben S. and Woodford Michael, 249–82. Chicago: University of Chicago Press.
Banaian King, Burdekin R.C.K., and Willett Thomas D.. 1995. On the Political Economy of Central Bank Independence. In Monetarism and the Methodology of Economics: Essays in Honor of Thomas Mayer, edited by Hoover Kevin D. and Sheffri Steven M., 178–97. Brookfield, Vt.: Edward Elgar.
Barro Robert J., and Gordon David B.. 1983. A Positive Theory of Monetary Policy in a Natural Rate Model. Journal of Political Economy 91 (4):589610.
Bernanke Ben S., and Mishkin Frederic S.. 1997. Inflation Targeting: A New Framework for Monetary Policy? Journal of Economic Perspectives 11 (2):97116.
Bernhard William. 2002. Exchange Rate Stability and Political Accountability in the European Monetary System. European Union Center Working Paper 1 (1). Urbana: University of Illinois.
Bernhard William, Broz J. Lawrence, and Clark William Roberts. 2002. The Political Economy of Monetary Institutions. Cambridge, Mass.: MIT Press.
Broz J. Lawrence. 2002. Political System Transparency and Monetary Commitment Regimes. International Organization 56 (4):861–87.
Broz J. Lawrence, Frieden Jeffry, and Weymouth Stephen. 2008. Exchange Rate Policy Attitudes: Direct Evidence from Survey Data. IMF Staff Papers 55 (3):417–44.
Calvo Guillermo A., and Végh Carlos. 1999. Inflation Stabilization and BOP Crises in Developing Countries. In Handbook of Macroeconomics, 1C, edited by Taylor John B. and Woodford Michael, 1531–614. Amsterdam: North-Holland.
Canavan Chris, and Tommasi Mariano. 1997. On the Credibility of Alternative Exchange-Rate Regimes. Journal of Developmental Economics 54 (1):101–22.
Cecchetti Stephen G., and Ehrmann Michael. 2002. Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes. In Monetary Policy: Rules and Transmission Mechanisms, edited by Loayza Norman and Schmidt-Hebbel Klaus, 247–74. Santiago: Central Bank of Chile.
Cooper Richard. 1971. Currency Devaluation in Developing Countries. Princeton Essays in International Finance No. 86. Princeton, N.J.: International Finance Section, Princeton University.
Crowe Christopher. 2006. Testing the Transparency Benefits of Inflation Targeting: Evidence from Private Sector Forecasts. Working Paper 06/289. Washington, D.C.: International Monetary Fund.
Crowe Christopher, and Meade Ellen E.. 2007. The Evolution of Central Bank Governance around the World. Journal of Economic Perspectives 21 (4):6990.
Cukierman Alex. 1992. Central Bank Strategy, Credibility, and Independence: Theory and Evidence. Cambridge, Mass.: MIT Press.
Cukierman Alex, Webb Steven B., and Neyapti Bilin. 1992. Measuring the Independence of Central Banks and Its Effect on Policy Outcomes. World Bank Economic Review 6 (3):353–98.
de Haan Jakob, and Kooi Willem. 2000. Does Central Bank Independence Really Matter? New Evidence for Developing Countries Using a New Indicator. Journal of Banking and Finance 24 (4):643–64.
Flood Robert, and Isard Peter. 1989. Monetary Policy Strategies. IMF Staff Papers 36 (3):612–32.
Forder James. 2000. Central Bank Independence and Credibility: Is There a Shred of Evidence? International Finance 3 (1):167–85.
Frankel Jeffrey A. 1999. No Single Currency Regime Is Right for All Countries or at All Times. Princeton Essays in International Finance No. 215. Princeton, N.J.: Princeton University Press.
Ghosh Atish R., Gulde Anne-Marie, and Wolf Holger C.. 2002. Exchange Rate Regimes, Choices and Consequences. Cambridge, Mass.: MIT Press.
Giavazzi Francesco, and Pagano Marco. 1988. The Advantage of Tying One's Hands: EMS Discipline and Central Bank Credibility. European Economic Review 32 (5):1055–75.
Gürkaynak Refet S., Levin Andrew T., and Swanson Eric T.. 2006. Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the U.S., U.K., and Sweden. Working Paper No. 2006-09. Federal Reserve Bank of San Francisco.
Keefer Philip, and Stasavage David. 2003. The Limits of Delegation: Veto Players, Central Bank Independence, and the Credibility of Monetary Policy. American Political Science Review 97 (3):407–23.
Levin Andrew T., Natalucci Fabio M., and Piger Jeremy M.. 2004. The Macroeconomic Effects of Inflation Targeting. Federal Reserve Bank of St. Louis Review 86 (4):5180.
Levy-Yeyati Eduardo, and Sturzenegger Federico. 2005. Classifying Exchange Rate Regimes: Deeds vs. Words. European Economic Review 49 (6):1603–35.
Lohmann Susanne. 1992. Optimal Commitment in Monetary Policy: Credibility Versus Flexibility. American Economic Review 82 (1):273–86.
Mahadeva Lavan, and Sterne Gabriel. 2000. Monetary Frameworks in a Global Context. New York: Routledge.
Mankiw N. Gregory, Reis Ricardo, and Wolfers Justin. 2003. Disagreement About Inflation Expectations. NBER Macroeconomics Annual 18:209–48.
McCallum Bennett T. 1995. Two Fallacies Concerning Central-Bank Independence. American Economic Review 85 (2):207–11.
Mishkin Frederic S. 1999. International Experiences with Different Monetary Policy Regimes. Journal of Monetary Economics 43 (3):579605.
Mishkin Frederic S. 2004. Can Inflation Targeting Work in Emerging Market Countries? NBER Working Paper No. 10646. Cambridge, Mass.: National Bureau of Economic Research.
Mishkin Frederic S., and Posen Adam S.. 1997. “Inflation Targeting: Lessons from Four Countries.” Federal Reserve Bank of New York Economic Policy Review 3(3): 9110.
Mishkin Frederic S., and Schmidt-Hebbel Klaus. 2002. One Decade of Inflation Targeting in the World: What Do We Know and What Do We Need to Know? In Inflation Targeting: Design, Performance, Challenges, edited by Loayza Norman V. and Soto Raimundo, 171219. Santiago: Central Bank of Chile.
Mishkin Frederic S., and Schmidt-Hebbel Klaus. 2007. Does Inflation Targeting Make a Difference? NBER Working Paper No. 12876. Cambridge, Mass.: National Bureau of Economic Research.
Polillo Simone, and Guillén Mauro F.. 2005. Globalization Pressures and the State: The Global Spread of Central Bank Independence. American Journal of Sociology 110 (6):1764–802.
Reinhart Carmen M., and Rogoff Kenneth S.. 2004. The Modern History of Exchange Rate Arrangements: A Reinterpretation. Quarterly Journal of Economics 119 (1):148.
Rogoff Kenneth. 1985. The Optimal Degree of Commitment to an Intermediate Monetary Target. Quarterly Journal of Economics 100 (4):1169–90.
Tavlas George, Dellas Harris, and Stockman Alan C.. 2008. The Classification and Performance of Alternative Exchange-Rate Systems. European Economic Review 52 (6):941–63.
Tomz Michael, Wittenberg Jason, and King Gary. 1998. CLARIFY: Software for Interpreting and Presenting Statistical Results. Cambridge, Mass.: Harvard University.
Walsh Carl E. 1995. Optimal Contracts for Central Bankers. American Economic Review 85 (1):150–67.
Recommend this journal

Email your librarian or administrator to recommend adding this journal to your organisation's collection.

International Organization
  • ISSN: 0020-8183
  • EISSN: 1531-5088
  • URL: /core/journals/international-organization
Please enter your name
Please enter a valid email address
Who would you like to send this to? *


Full text views

Total number of HTML views: 5
Total number of PDF views: 96 *
Loading metrics...

Abstract views

Total abstract views: 191 *
Loading metrics...

* Views captured on Cambridge Core between September 2016 - 22nd October 2017. This data will be updated every 24 hours.