1. presented by David Andrew Singer Massachusetts Institute of Technology Monetary Institutions, Partisanship, and Inflation Targeting co-author: Bumba Mukherjee Princeton/University of Notre Dame IPES November 18, 2006

2. 2 Inflation Targeting (IT): A Nominal Anchor for Monetary Policy Numerically specified target for inflation – Public commitment to price stability – Requires transparency and publication of inflation forecasts Since 1989, 25 countries have adopted IT The “monetary framework of choice” for LDCs (IMF 2006); Ben Bernanke also an advocate David Andrew Singer MIT

3. Table 2: Inflation Targeting Countries (as of 2003) CountryAdoption DateCountryAdoption Date Australia1993Mexico1995 Brazil1999New Zealand1989 Canada1991Norway2001 Chile1990Peru2002 Colombia1999Philippines2002 Czech Rep.1997Poland1998 Finland1993S. Africa2000 Hungary2001Spain1995 Iceland2001Sweden1993 Israel1991Thailand2000 Korea1998U.K.1992 Source: Truman (2003). The Slovak Republic, Indonesia, and Romania adopted IT in 2005. Finland and Spain joined the EMU in 1999 and no longer have autonomous monetary policies.

4. 4 Research Question Why do some countries adopt IT, while others do not? Importance: – Declining popularity of fixed exchange rates – Alternative nominal anchors (e.g., money targets) largely discredited – Is central bank independence sufficient to fight inflation? David Andrew Singer MIT

5. 5 Open Economy Monetary Policy Model Two actors: government and central bank Government’s loss function (based on Barro & Gordon 1983; Persson & Tabellini 2000) – Inflation vs. output deviation – Our key modification: partisanship (L,R) determines degree of inflation aversion (θ) David Andrew Singer MIT

6. 6 Model (continued) Central bank’s loss function: – Assume IT as an inflation-fighting option – Innovation: allow central bank’s inflation preferences to vary as a function of its regulatory mandate Central bank regulators more sensitive to financial stability, less likely to enact tight monetary policy (Copelovitch and Singer 2006) λ = 1 if central bank and bank regulator are separated David Andrew Singer MIT

7. 7 Observable Implication Adoption of IT more likely when right-leaning government and central bank not a regulator – Compatibility of preferences between government and central bank over inflation David Andrew Singer MIT

8. 8 Two Empirical Analyses First analysis: Markov transition model to explain adoption of IT – Captures the effect of IVs on probability of adopting IT, and conditional probability of maintaining IT [Second analysis: parametric and non-parametric models to explore impact of IT on inflation] David Andrew Singer MIT

9. 9 Markov Model: Data and Variables Sample: 49 countries, 1987-2003 DV: dichotomous (IT=1, 0 otherwise) IVs: – Central bank mandate (regulator=0, separate=1) – Partisanship – CBI – Polity, veto players – Exch rate regime and variability – Economic controls interaction David Andrew Singer MIT

10. Model 1Model 2Model 3 Covariates GDP Growth variability.035*** (.011).031*** (.012).045*** (.020).040** (.019).039*** (.015).058*** (.014) Real Interest Rate.050*** (.022).059*** (.021).043*** (.020).057*** (.022).061*** (.022).055*** (.021) Nominal Interest rate.068 (.074) -.065 (.092).073 (.058) -.062 (.049).050 (.062) -.069 (.070) Trade Openness.038 (.144) -.071 (.088).060 (.118) -.075 (.073).022 (.145) -.058 (.087) REER variability.039*** (.018).032*** (.010).020*** (.008).024*** (.007).043*** (.012).035*** (.014) NEER variability.024 (.028) -.031 (.030).023 (.020) -.035 (.028).035 (.030) -.025 (.032) Current Account-.022** (.011) -.036** (.017) -.055* (.030) -.072* (.041) -.045** (.018) -.038** (.019) CBI.030 (.071).039 (.050).029 (.020).033 (.042).031 (.026).044 (.031) Partisanship x Separate.151*** (.049).138*** (.037).103*** (.036).142*** (.040).132*** (.036).114*** (.045) Partisanship.021* (.012).032* (.018).034* (.019).022* (.013).023* (.014).024* (.014) Separate Central Bank.051* (.030).045* (.024).043* (.027).040* (.024).041* (0.22).055* (.033) See paper for full regression table

11. 11 Findings Right government + non-regulatory central bank increases likelihood of adopting IT – When separate CB, one std. dev change in partisanship (toward the right) increases probability by 35% Additional finding: IT reduces inflation (see paper) David Andrew Singer MIT