The 2008 crisis and the Covid-19 pandemic presented monetary policy frameworks worldwide with significant challenges. This column reports the results of an updating of the Comprehensive Monetary Policy Frameworks classification, which now covers 186 countries over the 50 years from 1974 to 2023. The key finding is that countries have been switching between monetary frameworks less frequently in recent years. On the other hand, there have been more, and useful, internal changes within the existing frameworks, particularly inflation targeting and loosely structured discretion.
In the aftermath of the Global Crisis, there was some speculation that the days of inflation targeting might be numbered (e.g. Frankel 2012), but also some pushback (e.g. Reichlin and Baldwin 2013). We now have data that classifies countries’ monetary policy frameworks up to 2023, well beyond the Global Crisis, and it is clear that inflation targeting is more, not less, widespread. On the other hand, there have been important – and welcome – changes within (rather than between) inflation targeting and the other main monetary framework in use.
The Comprehensive Monetary Policy Frameworks (CMPF) classification (Cobham 2021, 2025) now covers 186 countries over 50 years. It provides a ‘full menu’ of 32 different monetary policy frameworks (MPFs) which can be grouped together in a target variable aggregation of nine categories. The classification covers both domestic and external monetary policy targets, i.e. targets for money, inflation, and exchange rates. It starts from the announced objectives of monetary policy, where they exist, and checks how well they are attained, so it has de facto as well as de jure elements. Where such objectives do not exist or are not attained, countries’ monetary policy frameworks are in most cases identified as ‘discretion’, which is then divided on the basis of the objectives and instruments of monetary policy into unstructured, loosely structured, and well-structured discretion. The classification also distinguishes between exchange rate fixing (imposed by a central bank which dominates foreign exchange transactions) and exchange rate targeting (pursued by the central bank via an active and autonomous foreign exchange market), and it includes categories of multiple direct controls (command economies), currency union membership, and the use of another sovereign’s currency. 1
The results of the update: Consolidation
The key results of the update are in Figure 1, which shows the percentage of countries in each category in terms of the target variable aggregation: there has been a strong growth in inflation targeting and a strong decline in loosely structured discretion since the 1990s, but those changes are slower in the last five to ten years. It can also be seen that the proportions of countries fixing or targeting their exchange rates has remained remarkably steady since 1999. 2
Figure 1 Target variable aggregation, whole world
The slowing pace of change can also be seen, even more clearly, in Figure 2, which shows the picture for the advanced economies only, where Denmark and Hong Kong peg their exchange rates, but all other countries target their inflation rates. 3
Figure 2 Target variable aggregation, advanced economies
A more precise measure of the global rate of change is provided by Figure 3, which shows the number of monetary policy framework changes per year. In the early part of the period, from 1975 to 1989, there were on average 7.5 changes per year. There was a much higher level in 1990-95, with an average of 17 changes per year, associated with the breakup of the USSR and Yugoslavia and the associated upheavals, and a secondary peak in 1999 as countries moved into Economic and Monetary Union (EMU), with an average over 1996-2001 of 10.2. But since then, the average number of changes has fallen to 4.2 in 2002-12 and 2.7 in 2013-23. What this suggests is that countries are becoming content with the monetary policy frameworks they have adopted, at least in terms of the relatively broad definitions of these frameworks. It is notable, for example, that the Global Crisis was not followed by a large increase in monetary policy framework changes. For the advanced economies at least, it could be suggested that what has occurred (by the early 2000s) is the final emergence of a new long-run equilibrium set of monetary policy frameworks to replace the fixed exchange rates that nearly all countries had under Bretton Woods. 4 Instead, the emphasis seems to have shifted towards changes within those monetary policy frameworks, that is, towards how to operate and implement the given frameworks, in particular inflation targeting and loosely structured discretion.
Figure 3 Number of monetary policy framework changes per year
Changes within inflation targeting
The full menu of monetary policy frameworks in the classification distinguishes between ‘full’ and ‘loose’ inflation targeting, on the basis of the width and the attainment of the target. While there are plenty of transitions from loose to full inflation targeting, and there is a small number of cases where countries have failed to attain their targets and therefore been reclassified, typically as loosely structured discretion, there are no cases in the dataset where countries have switched out of full inflation targeting.
What has been more interesting in the recent period is the internal evolution of the inflation targeting framework. Here, a number of advanced economies, from Australia and Canada to the euro area and the US, have reviewed their monetary policy frameworks with particular reference to the objectives of policy, and introduced significant changes. 5 The essence of all these changes is a renewed emphasis on employment and/or output as well as price stability (but no increased focus on asset prices). In the early days of inflation targeting, it had been common to argue that controlling inflation would at the same time stabilise output at the natural rate (via the ‘divine coincidence’), and inflation targeting was often seen as the solution to the assignment problem with a single instrument, the policy interest rate, allocated to the single objective of price stability. In some of the recent cases, the addition of a secondary policy objective has been predicated on recognition of the apparent long-term fall in the neutral interest rate and flattening of the Phillips curve, and on an acceptance of the importance of supply (as well as demand) shocks, whose effects cannot be addressed from the demand side over the same time horizon by monetary policy alone. In many cases the policy reviews have also drawn attention to the role of fiscal policy and the long-forgotten issue of monetary-fiscal coordination.
Changes within loosely structured discretion
The other most important monetary policy framework in the recent period is loosely structured discretion, which is essentially a residual category, defined by the lack of quantified and attained objectives, and therefore covers a wide range of monetary arrangements. The absence of information about objectives makes it impossible to disaggregate the category in the standard way, but it turns out to be possible to make a useful partial distinction on the basis of countries’ monetary instruments alone, and that enables us to identify an important evolution within this framework over the period.
A three-way distinction between low, medium, and high potential effectiveness of the monetary instruments has been applied to all the cases of loosely structured discretion within the dataset. 6 Here the typical instruments for loosely structured discretion low-effectiveness are direct credit controls, those for high-effectiveness are open market operations in deep and liquid secondary markets, and those for medium-effectiveness are open market operations in primary markets and reserve requirements. Figure 4 shows the numbers of the different types of loosely structured discretion: in the 1970s and 1980s low effectiveness dominated with 70-80% of the cases of loosely structured discretion, but from the early 1990s medium effectiveness rose to over 80% and low effectiveness fell to under 20%. Loosely structured discretion high effectiveness has never been important, it disappears entirely by 2006, and before that it was found only in some advanced and a few Latin American emerging economies, and with relatively small duration: in all but one case, countries moved on from high effectiveness loosely structured discretion directly to inflation targeting. 7
Figure 4 Loosely structured discretion split into three types by effectiveness of instruments
What this shows is an important evolution within the loosely structured discretion category, with developments in the monetary instruments (based on developments of money and bond markets) which facilitate the transition over time to other monetary policy frameworks, a transition that a significant number of countries have now made (mostly to inflation targeting): peak use of loosely structured discretion was 81 countries in 1997, but by 2023 that was down to 55.
Conclusion
The update of the Comprehensive Monetary Policy Frameworks classification to 2023 shows a continued rise in inflation targeting and a decline in loosely structured discretion, but with a slower rate of change in the last few years. This suggests that countries may be becoming increasingly content with their choice of monetary policy framework and focusing more on the best way to implement and operate those frameworks. This can be seen in the important changes which have occurred within the two main frameworks – inflation targeting and loosely structured discretion.
These evolutions should be welcomed. The changes within loosely structured discretion show that the role of monetary instruments is being addressed by the development of the financial markets which make other and more effective instruments available, and this in turn opens the way to the choice of other monetary policy frameworks in the future. On the other hand, the changes within inflation targeting can be seen as an acknowledgement of the complexities of monetary policymaking in an interdependent and uncertain world affected by a range of supply as well as demand shocks with varying lags. The simple one objective/one instrument view of inflation targeting was always too simple (though it may have helped to develop the credibility of monetary policy in the early days), so allowing for other (secondary) objectives and longer time horizons are obvious improvements.
Source : VOXeu
