Empirical Essays on Monetary Policy Regimes

Monetary policy is arguably one of the most important tools for government to influence the economy. Economists and policy-makers have long sought the ideal framework for monetary policy. The two typical monetary policy frameworks followed by the central banks are exchange rate targeting (usually known as a fixed exchange rate in the literature on exchange rate arrangements) and inflation targeting.;There is a large empirical literature on the economic impacts of the two targeting regimes. In the literature on inflation targeting, inflation targeting countries are usually compared to a group non-inflation targeting countries. In the literature on exchange rate arrangements, exchange rate targeting regime is evaluated against the floating rate regime. The monetary policy of the non-inflation targeting or floating rate countries is not clearly defined. The effect of a specific monetary policy regime, however, could only be accurately assessed by having a clear alternative monetary policy regime as benchmark according to Gertler's comment in Ball and Sheridan (2005).;This thesis aims to fill the gap by providing empirical evidences on the effect of inflation targeting regime on the economy against a clearly defined benchmark, the exchange rate targeting regime.;To facilitate the empirical investigation, Chapter 1 introduces a new de facto classification of monetary policy regimes which includes the two regimes. The 186 countries over the 35-year post-Bretton Woods period are classified in the inflation targeting or exchange rate targeting regime based on their actual policies in practice. The effect of inflation targeting on the economy are then assessed against the exchange rate targeting regime in the next two chapters.;The literature on the behavior of risk-averse firms under price or cost uncertainty suggests a possible trade creation effect of inflation targeting regime through the stabilization of price level. Chapter 2 empirically estimate this trade creation effect using the gravity model of bilateral trade. The trade creation effect of inflation targeting found in this chapter, even much moderate than the effect of currency union and a fixed exchange rate reported in the previous studies, exists in the bilateral trade between an inflation targeter and all of its trading partners. This implies that inflation targeting regime may not have a lower level of total trade than exchange-rate targeting regime. This view is also supported by the result of the empirical analysis on the total trade of the two regimes.;Chapter 3 empirically estimates the impact of inflation targeting regime on economic growth against the exchange rate targeting regime. The results estimated by the two-step system GMM using various specifications and robustness tests consistently suggest that inflation targeting regime has a positive impact on economic growth.