9-56, Federal Reserve Bank of Kansas City. Summers, P. (2005), “What Caused The Great Moderation? Some Cross-Copuntry Evidence,” Economic Review, Federal Reserve Bank of Kansas City, Third Quarter, pp. 5-32. Truman, E. (2003), “Inflation Targeting in the World Economy,” Institute for International Economics. Vega, M. and D. Winkelried (2005), “Inflation Targeting and Inflation Behavior: A Successful Story?” International Journal of Central Banking 1(3) pp. 153-75. BIS Review 74/2008  7  Figure 1: Growth and inflation in developing economies 25  6  Inflation  4 15 3 10 2 5  Output Growth  5  20  1  0  0 1974  1982  1990 Inflation  1998  2006  Growth  Note: Inflation was calculated using YoY \% change in consumer prices, given by IFS line 64. Growth was calculated as the YoY \% change in GDP volume as given by IFS line 99b. Averages are taken over all countries that have data available from 1975. Industrial and developing status of countries has been taken directly from IFS. Source: IFS. Figure 2: Inflation and output growth volatility in developing economies  10  8  8  6  6  4  4  2 1974  1982  1990  1998  2 2006  Growth Volatility (s.d.) Inflation Volatility (s.d.)
•  A second related explanation is focused on structural and technological changes which are permanent in nature, but were not directly caused or controlled by macroeconomic policies. For example, a special type of technological progress frequently mentioned in the discussion of output volatility refers to the improved management of inventories. If a significant part of the business cycle dynamics occurs through inventory fluctuations, “just in time” technologies and better management of inventories in general would reduce volatility along the business cycle (McConnell and Perez-Quiroz, 2000; Cecchetti et al., 2005). Another important structural change is related to worldwide economic integration and globalization, as reviewed in the Geneva Report prepared for this conference (Gerlach et al., 2008). Cavallo (2007), for example, emphasizes that trade openness has reduced output volatility, and hence, more open economies are also more stable. This evidence refutes the old view that more open economies are more exposed to volatility. On the contrary, Cavallo (2007) argues that more open economies have more opportunities to adjust to international shocks. Following this argument, the notable increase in openness all around the world would make all countries more stable. 1  •  A third and final factor which I would like to emphasize is related to improved monetary policy. These reforms have resulted in the reduction of not only inflation levels, but also its volatility. Figure 1 shows average growth and inflation over an ample set of developing countries, 2 while figure 2 shows the volatility of output and inflation.