September 2020: Reflections on the first 100 countries

Image credit: “The Forth Bridge, a Unesco World Heritage site. Scotland” by Chris Golightly is licensed under CC BY-NC-SA 2.0.

This website exists to provide a repository for an original database of monetary policy frameworks, classified according to a more detailed and multi-dimensional set of criteria than has been used before, with the rationale for the individual country classifications made available through the country details. Since February 2018 when the site was launched and the original working paper finalised (revised version now published in Oxford Economic Papers here), work has continued to expand the coverage.

We now cover 107 countries (and/or currency areas, such as the Eurozone): to the 27 ‘advanced’ and 33 ‘emerging’ countries initially included have been added an additional 15 Middle East and North African countries, 14 Latin American countries, and 18 Asian countries/currency areas. Together, these account for roughly 95% of world GDP and around 84% of world population.

The first major trend revealed by the data is the move away from exchange rate targets and towards domestic, particularly inflation, targets. This can be seen clearly in the visualisations for different groups of countries, in terms of the full menu or the aggregation by target variables (and with the charts scaled in different ways). This trend is very clear for the advanced countries, strong for emerging and Latin American countries, but much less strong in the MENA and Asian groupings.

The second major trend is the move towards frameworks whose more sophisticated financial and monetary infrastructure offers higher – substantial and intensive – degrees of monetary control, as seen in the visualisations for the different country groups by degree of monetary control. This trend is more consistent across country groupings.

It may also be useful to ask how the classification has performed through the extension to additional countries. The answer is that the classification has held up well, and no issues have emerged that would support any significant changes.

This no doubt reflects the fact that, although the classification was devised mainly on the basis of work on advanced and emerging countries, some work had already been done at an early stage on developing as well as emerging MENA countries. In addition, the distinction between emerging and developing is less than watertight (which is why both are included in the regional groupings), and some of the emerging economies covered had clear ‘developing’ country characteristics in the 1970s and 1980s. Thus the classification has been able to deal with the range of countries at varying per capita income levels, and from different regions, that have subsequently been assessed.

For the future, the aim is first to get to a more or less complete coverage of countries/currency areas other than very small ones, defined as those with a population under 250,000 in 2017: that means around 175. The major gaps remaining are Sub-Saharan Africa, the Caribbean (including Cuba), non-EU emerging and developing European countries, and the ex-USSR countries of Eurasia and Central Asia, from Georgia and Armenia to Tajikistan and Kyrgyzstan.

Second, a concern flagged up in the original paper (Cobham, 2018) has indeed turned out to be important: the category ‘loosely structured discretion’ (LSD) is a very wide category, such that very different countries, or one country under very different arrangements in different periods (e.g. India), all end up in this one category. The problem is that it is possible to conduct monetary policy without specified or quantified objectives in quite different ways: the classification has to be discretion in each case, and there is a wide range of possible arrangements in between the more easily defined and identified end-point categories of ‘unstructured’ and ‘well-structured’ discretion. The investigation is therefore driven to focus more on the instruments available since they determine what objectives are feasible, and that is the main reason why the country details for many developing countries are much longer than those for advanced countries with precise objectives within well-structured monetary policy frameworks.

The question that then arises is whether it is possible to make a finer disaggregation of the LSD category in some other way, for example on the basis of the monetary policy instruments available that obviously affect the ability to pursue quantitative objectives if desired. The answer, as it appears so far, is that it would be possible to make a triage between countries/frameworks with only direct instruments, those that are using some indirect instruments and moving towards the adoption of others, and those which rely essentially on indirect instruments. Countries in the latter category can be regarded as ‘LSD by choice’: they have the instruments that would allow them to pursue specific quantitative targets if they so wished. On the other hand, those in the other two categories are ‘LSD by default’, insofar as they do not have the ability to successfully pursue quantified objectives even if they wished to do so. Such a triage will be attempted in the future, drawing directly on the country details already assembled, after the gaps above have been filled.

After that, it will be time to update the whole classification (as in painting the Forth Bridge, a few miles down the road from Heriot-Watt, at least before the new painting procedure of 2011, see https://www.theforthbridges.org/forth-bridge/history/restoration/).


 

July 2020 Using the data: advance publications

Two papers which make use of the classification data are now available as advance publications:

David Cobham and Mengdi Song, ‘Transitions between monetary policy frameworks and their effects on economic performance’, Economic Modelling, https://doi.org/10.1016/j.econmod.2020.02.049:

Abstract

The widespread adoption of inflation targeting (IT) from the early 1990s led to investigations of its effect on macroeconomic performance (inflation and growth), with the emergence of a majority view that the effects were small for advanced countries but possibly larger for emerging economies. We revisit the issue, using a new de facto (rather than de jure) classification of monetary policy frameworks and employing the difference-in-differences approach with regression to the mean effects in order to deal with the problem of endogeneity. We find small effects for advanced countries but insignificant effects for emerging economies. We then question the nature of the mean to which regression occurs and suggest instead that there are strong international trend/network effects leading policymakers to make similar policy decisions (with similar macro outcomes) from within different frameworks. We also find IT has not affected macro performance in the period after the Global Financial Crisis. 

and

David Cobham and Mengdi Song, ‘How do countries choose their monetary policy frameworks?’, Journal of Policy Modeling, https://doi.org/10.1016/j.jpolmod.2020.04.008

Abstract

This paper investigates the determinants of countries’ choices of monetary policy framework. A brief narrative focused on groupings of countries motivates an econometric analysis which draws on previous work on the determinants of exchange rate regimes, bringing in standard factors as well as the trade networks of potential anchor currency blocs and the financial markets depth that are emphasised in the narrative. The model turns out to be able to predict three quarters of countries’ choices, and there is no obvious systematic pattern in the errors. The results have important implications for how countries should choose their monetary policy frameworks.

 

February 2020 Extension: Latin American countries

The classification has now been extended to (southern, central and northern) Latin America, covering 20 countries of which six were previously included as emerging economies: Argentina, Brazil, Chile, Mexico, Peru and Venezuela. At a later date a number of Caribbean countries will also be covered, so this will become a full Latin American and Caribbean grouping. A few small changes have been made to the text, but not the classification, for Venezuela.

July 2019 Extension: the Middle East and North Africa

The classification has now been extended to the MENA region, defined here to cover Iran, Turkey and 17 Arab countries. The list includes four that were previously included as emerging economies: Egypt, Jordan, Morocco and Turkey. One small classification change has been made for Jordan (1996-2000, identified previously as full exchange rate targeting but now as loose exchange rate targeting), there is a corresponding change to the country details text for Jordan, and there is a small change to the country details text for Turkey, 1989-2002. These changes have been applied under the emerging economies as well.

February 2019 Updating and Revision

The classification has now been extended to 2017 (so it now covers 44 years in total). In addition, one substantive change has been made: the US 1990-95 is now classified as ‘loosely structured discretion’ LSD instead of ‘well structured discretion’ WSD, which is more consistent with other episodes of LSD. The old classification can be found here, and the old individual country details here.

November 2018 Revision

The nomenclature of the second aggregation of monetary policy frameworks has been changed from ‘stages of development’ – with subgroups ‘basic’, ‘intermediate 1’, ‘intermediate 2’ and ‘developed’ – to ‘degree of monetary control’, with subgroups ‘rudimentary’, ‘intermediate’, ‘substantial’ and ‘intensive’. The change reflects both a view that ‘developed’ begged too many questions and the view that the previous perspective was inappropriately monotonic. The allocation of the various frameworks among these four aggregates has not been changed.

A comprehensive classification of monetary policy frameworks

This site is host to a new dataset with a comprehensive classification of monetary policy frameworks, prepared by David Cobham, professor of economics at Heriot-Watt University, Edinburgh, Scotland, UK (with many thanks to Alexander Cobham for his help in setting up the website).

The current dataset covers 60 advanced and emerging economies. Over time the dataset will be expanded to cover some 100 developing economies, starting with those from the Middle East and North Africa and those in Latin America.

This site provides an overview of the approach, including the original working paper; the results for individual countries; and the classification system used.

Researchers are encouraged to use the dataset in any relevant work, and are requested to keep us informed so that we can post links and commentary.