7 - Inflation control around the world: why are some countries more successful than others?

Summary

Introduction

During the last two decades the rate and variability of inflation has fallen across the world, including in many former high-inflation countries in Latin America and eastern Europe. This development has coincided with a general decline in overall economic variability and an increased emphasis on price stability in the conduct of monetary policy, in many cases formalised with changes in the monetary policy framework towards an explicit inflation target.

This general trend towards increased price stability and monetary policy reform notwithstanding, it remains the case that some countries have been more successful in controlling inflation than others, and the fact is that these countries are more or less the same countries that have been more successful over longer periods. Thus, relative inflation performance has remained stable over time, with the worst performers usually to be found among emerging market economies and very small, open economies (VSOEs).

This chapter focuses on these two issues. First, it tries to find out which factors explain this difference in inflation volatility between countries. Second, it seeks to establish what it is that explains the decline in inflation volatility over time. To tackle these issues, a country sample of forty-two of the most developed countries in the world is used, with countries chosen on the criteria that their per capita income is at least as high as that of the poorest OECD member and that their GDP level is at least as high as that of the smallest OECD member.