Rise of iPhones and Inflation Targeting in Financial Stability
In the era of iPhones, inflation targeting has played a crucial role in eradicating international financial crises. This analysis by Andrew K. Rose from CEPR and NUS Business School discusses how the first iPhone release marked a significant milestone, and how countries adopting inflation targeting have seen a reduction in currency crises. The evolution and spread of inflation targeting among various countries are explored, highlighting its impact on global economic stability.
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iPhones, iPhones, iCrises Inflation Targeting is eradicating Inflation Targeting is eradicating International Financial Crises in International Financial Crises in the iPhone era the iPhone era iCrises and and iTargets iTargets: : Andrew K Rose CEPR and NUS Business School
June 2007 CEPR Policy Insight 1 Are International Financial Crises a Barbarous Relic? Inflation Targeting as a Monetary Vaccine First iPhone was released iPhone has stood the test of time well >2 billion sold, Apple first $1,000,000,000,000 company Inflation targeting has stood up just as well Almost no one has experienced an international financial crisis (iCrisis) on an iPhone, because of inflation targeting (iTargeting); currency crises have been crushed! Rose: iPhones, iCrises, and iTargets 2
International Monetary Systems, Past and Present (from 2007) Bretton Woods Low Fixed Partly/Wholly International Exchange Rate Controlled Limited Planned Necessary Key in principle Key in principle Key in practice Large, Northern Dependent, Unaccountable Low Low Rose: iPhones, iCrises, and iTargets Inflation Targeting High Floating Wholly Domestic None/Inflation Forecast Relatively unrestricted High Unplanned Not required* Small Negligible Small* OECD/LDCs, often small Independent, Accountable High High 1 2 3 4 5 6 7 8 9 10 Role of Gold 11 Role of US as Center Country 12 Key Members 13 Central Banks 14 Transparency 15 Alignment with Academics Regime Durability Exchange Rate Regime Focus of Monetary Policy Intermediate Target Capital Mobility Current Account Imbalance Capacity System Design International Cooperation Role of IMF 3
IT: Imitation as Flattery Inflation targeting has continued to spread In 2007: 27 countries Since, >20 more countries have started Some big: India, Japan, Russia, United States IT now ubiquitous Covers 35 of the 36 OECD members (Denmark) Covers 97.8% of the MSCI Developed Markets Index (HK, Singapore, Denmark) 17 of G20 17 of 26 developing economies in the MSCI Emerging Markets Index Previous big fixers all target inflation now (UK, Sweden, Mexico, Thailand, Indonesia, Korea, Russia, Brazil, and Turkey) Rose: iPhones, iCrises, and iTargets 4
Central Banking is Conservative but IT is hot The Conquest of Inflation Targeting 80 60 Argentina 40 USA 20 EMU NZ 0 1990 2000 2010 2020 % World GDP under Inflation Targeting Number of Inflation Targeting Countries % World GDP, PPP Rose: iPhones, iCrises, and iTargets 5
Darwinian Logic: the Attraction of Durability In 2007, few inflation targeters had been sorely tested Now they have! Countries experienced the GFC 2007-09 differently But no inflation targeter changed its monetary regime Ditto COVID-19 pandemic (so far) No widespread outbreak of capital controls (yet) Both absolute, relative to protectionism on goods. Comparisons: Bretton Woods lasted 1958-1973 maximally Pre-WW1 Gold Standard had many crises, lasted perhaps 45 years Rose: iPhones, iCrises, and iTargets 6
IT implemented similarly, compared to most economic policies No other substantive area of economic policy has such uniformity across countries Almost all inflation targeters have similar inflation mandates and targets, floating exchange rates, accessible inflation forecasts, independent central banks, and significant accountability True of taxation? Debt management? Procurement? Housing? Labor markets? Anti-trust? Environmental policy? Rose: iPhones, iCrises, and iTargets 7
Effect 1: Currency Crashes are Disappearing Rose: iPhones, iCrises, and iTargets 8
Effect 2: Waning Interest in Currency Crises Crises? What Crises? Worldwide Google Searches by Query 'International Financial Crisis' 100 20 40 60 80 0 2005m1 2010m1 2015m1 2020m1 'Currency Crisis' 100 20 40 60 80 0 2005m1 2010m1 2015m1 2020m1 Rose: iPhones, iCrises, and iTargets 9
Effect 3: System can Handle More Imbalances Global Capacity for Current Account Imbalances Large Imbalance: |Current Account| > 4% GDP 150 100 50 0 1990 2000 2010 2020 % World GDP with big imbalances Number Imbalanced Countries % World GDP, PPP Rose: iPhones, iCrises, and iTargets 10
The Future Inflation targeting seems a monetary vaccine But (some) international financial crises will continue There are anti-vaxxers But vaccines work, so there will be fewer crises and fewer anti-vaxxers IT continues to be tweaked More flexible More tuned to financial stability Technical adjustments Before COVID-19 pandemic, concern with handling deflationary pressures Rose: iPhones, iCrises, and iTargets 11
COVID-19 Impact? Hard to imagine COVID-19 leads to IT exit Few trusted frameworks discarded with such policy uncertainty; public craves stability Stable inflation expectations likely to help fiscal authorities handle debt, helicopter money, mass monetization, stability of credit markets, Historically, inflation follows large debt increases (wars) Inflation targets could rise to inflate away nominal obligations But hard to imagine IT being discarded Rose: iPhones, iCrises, and iTargets 12
ITs The Only Game in Town IT is popular and durable One of the few games in town Nominal income targeting hasn t been adopted by any country Few target money growth Some monetary strategy is better than none! The onlygame in town if you re not a small country willing to endure the rigors of a fixed exchange rate (Denmark, Hong Kong, Bulgaria, ) Rose: iPhones, iCrises, and iTargets 13
