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The consolidation of the Anglo-Saxon/European consensus on price stability: from international coordination to a rule-based monetary regime

[working paper]

Krampf, Arie

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Corporate Editor Freie Universität Berlin, FB Politik- und Sozialwissenschaften, Otto-Suhr-Institut für Politikwissenschaft Kolleg-Forschergruppe "The Transformative Power of Europe"
Abstract During the 1990s, a consensus consolidated among policy makers and economists worldwide regarding the desirability of very low inflation targeting. So far, this process has been explained on the basis of a domestic-functional thesis, according to which commitment to very low inflation provides local economic gains with no costs. In this paper, I present an alternative explanation, according to which the global norm of very low inflation targeting was consolidated as a political solution to the problem of exchange rate misalignment and volatility. I argue that policy makers in Germany and the US believed that convergence of monetary policies and inflation rates, in addition to liberalization of financial markets, will stabilize exchange rates without the need for direct coordination. The paper employs the theory of liberal intergovernmentalism as a benchmark to explain the choice of the European and the G-5/7 countries to establish a low-inflation rule-based international monetary regime. The paper concludes that the regime of very low inflation targeting was consolidated as a politically viable solution to a political problem rather than as an economic best practice. Furthermore, it concludes that the norm of very low inflation targeting was a “corer solution” that neglected the problem of exchange rate stability.
Keywords monetary policy; inflation; rate of exchange; financial market; international monetary system; EU; EEMU; IMF; price; stability; monetarism; convergence; commerce; liberalization
Classification Economic Policy; National Economy
Free Keywords low inflation targetting; monetary policies; liberal intergovernmentalism
Document language English
Publication Year 2012
City Berlin
Page/Pages 35 p.
Series KFG Working Paper Series, 47
ISSN 1868-7601
Status Published Version; peer reviewed
Licence Deposit Licence - No Redistribution, No Modifications