Inflationtargeting, flexible exchange rates and macroeconomic performance since the g reat recession 3 some caveats are in order concerning the extent to which our findings lend themselves to generalisations. Working papers in pdf format can be downloaded free of charge from. Posen he key issue facing central banks as we approach the end of the twentieth century is what strategy to pursue in the conduct of monetary policy. Introduction to the inflationtargeting debate nber. Introduction to the inflationtargeting debate, nber chapters, in. Yet, it is important to realize that not everyone views inflation targeting as a strict rule. One choice of monetary strategy that has become increasingly popular in recent years is inflation targeting, which. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the czech republic, poland, and hungary. Inflation targeting was pioneered in new zealand in 1990.
Iters should say more about the weight they put on output gap stabilisation svensson, woodford 3. The volume opens with a discussion of the optimal formulation of inflationtargeting policy and continues with a debate about the desirability of such a pdf model for the united states. Inflation targeting works because it stimulates demand just enough. Jan 15, 2020 the volume opens with a discussion of the optimal formulation of inflation targeting policy and continues with a debate about the desirability of such a model for the united states. Yet a central tenet of inflation targeting is that price stability must be the primary longrun goal of monetary policy. Inflation targeting framework south african reserve bank. This pdf is a selection from a published volume from the national bureau of economic research volume title. Apr 12, 2018 and every time a crisis happens it takes more monetary heft to get out of it. The rationale for inflation targeting he decision to organize a countrys monetary strategy around the direct targeting of inflation rests upon a number of. Numerous and frequentlyupdated resource results are available from this search.
Nov 29, 2019 inflation targeting is a central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. Inflation targeting is a monetary policy in which a central bank has an explicit target inflation rate for the medium term and announces this inflation target to the public. Inflation targeting is frequently classified as a rule, which, if followed very strictly, could open it up to criticism see the discussion of the costs of inflation targeting that follows. The volume opens with a discussion of the optimal formulation of inflation targeting policy and continues with a debate about the desirability of such a model for the united states. This research was conducted to evaluate the adoption of inflation targeting in south africa as a strategy to maintain price stability. Inflation targeting in context of nationalisation debate. Both simple rules are effective ways to overcome the timeinconsistency problem. If unchecked, inflation can wreak havoc on the economy and the future of the country. Inflation targeting is a monetary policy strategy used by central banks for maintaining inflation at a certain level or within a specific range. Inflation targeting lite itl countries float their exchange rate and announce an inflation target, but are not able to maintain the inflation target as the foremost policy objective.
Clear, balanced, and authoritative, inflation targetingis a groundbreaking study that will have a major impact on the debate over the right monetary strategy for the coming decades. Inflation targeting is neither necessary nor sufficient. The inflation targeting debate, pages 110, national bureau of economic research, inc. Central banks in germany and switzerland first used inflation targeting in the late 1970s. Chapter in nber book the inflationtargeting debate 2005, ben s. When prices rise at this ideal pace, it drives consumer demand. Targeting some theoretical core inflation rate, which excludes a significant portion of any inflation index in a low income economy, was felt to have little utility. Inflation targeting is a central banking policy that revolves around meeting preset, publicly displayed targets for the annual rate of inflation. Features of inflation targeting as a type of monetary strategy 41 state a desired target range for inflation usually around 1. If there is broad enthusiasm for the proposal in india among those the ft has chosen to ask, it is only because there is less debate than there ought to be.
Jan 14, 2017 list of disadvantages of inflation targeting. Description of the book the inflationtargeting debate. The inflationtargeting debate pdf free download epdf. Misconceptions about inflation targeting i would like to turn now, briefly, to comment on a few key misconceptions about inflation targeting that have gained some currency in the public debate. Merits of inflation targeting in south africa 16 2. Inflation targeting has sometimes been criticised for being inflation only centred but ignoring economic growth considerations. During this period, inflation has come down in many countries and been relatively stable by historical standards. One option, which i favor, is setting an explicit numerical target for inflation within the context of our current dual mandate. Pdf inflation targeting is neither necessary nor sufficient. Inflation targeting is a monetary policy where a central bank follows an explicit target for the inflation rate for the mediumterm and announces this inflation target to the public. Clear, balanced, and authoritative, inflation targeting is a groundbreaking study that will have a major impact on the debate over the right monetary strategy for the coming decades. The inflationtargeting debate national bureau of economic research studies in business cycles volume 32national bu. In a small open economy model, we compare the outcome of these two single mandates to welfare maximizing optimal monetary policy under commitment or discretion.
Concern is financial instability, credit crunch that may accompany an asset price correction entirely consistent with inflation targeting, but need to look beyond the usual mediumterm horizon. Therefore, it is possible that the impact of inflation targeting on inflation and on other macroeconomic variables may arise through its effects on inflation expectations and on the expectationsformation process. However, in inflation targeting, there is a preset, publicly declared target. This paper identifies 19 emerging market countries as practitioners of itl. Indian monetary policy in the time of inflation targeting. However, the debate about its very merits and macroeconomic consequences remains inconclusive. Inflation targeting involves mechanical, rulelike policymaking. Bernanke 2003 on the other hand, has argued that the idea of inflation targeting focusing exclusively on control of inflation and ignoring output. The evidence shows that inflation targeting countries have been able to reduce their longrun inflation below the levels that they would have attained in the absence of inflation targeting, but not below the levels that have been.
They also show that inflation targeting is not a panacea that can make inflation perfectly predictable or reduce it without economic costs. Central banks that have switched to inflation targeting have generally been pleased with the results. The inflation targeting debate volume authoreditor. The economy will react and be influenced by thousands of factors and it is not possible to always counter so many influencing elements. Kahn o ver the last two decades, many central banks have adopted formal inflation targets to guide the conduct of monetary policy. Reliable information about the coronavirus covid19 is available from the world health organization current situation, international travel. One of the features of an inflationtargeting framework is the greater degree of transparency it brings to monetary policy. As a unique comparative study of what central banks actually do in different countries around the world, this book will also be invaluable to anyone interested in. But thats not an issue for a central bank with two overriding objectives, not the targeting of inflation and unemployment as such, but to ensure a recession never happens, and to finance, through moneyprinting if necessary, escalating government spending. What are the costs and benefits of inflation targeting. In this way, we bring new evidence to both the inflation targeting debate and the convergence literature.
Unrealistic in nature inflation targeting can become unrealistic. The resulting empirical difference in the inflation targeting literature is partly because of the relatively small number of inflation targeting countries and the short history of this new monetary framework. Frb speech, bernankea perspective on inflation targeting. Another topic for debate, albeit outside the scope of this research, is therefore the question whether sweden, rather than. Explicit inflation targeting has been adopted by a number of central banks around the world, including those in australia, canada, finland, israel, new zealand, spain, sweden, and the u. Inflation targeting and financial stability monetary. Bernanke s hould the federal reserve announce a quanti. Advantages and disadvantages of inflation targeting 12 2. The very nature of an economy, especially the large ones, is that it takes a life of its own. More about this item book chapters the following chapters of this book are listed in ideas. Inflation targeting has been a success in the countries that have adopted it. Alan greenspan has provided a widelycited definition of price stability as a rate of inflation that is sufficiently low that households and businesses do not have to take it into account in making everyday decisions. Under constrained discretion, the central bank is free to do its best to stabilize output. The comparison was done to determine if the reserve bank was on the right track in adopting inflation.
As the name suggests, in such inflationtargeting regimes, the central bank is responsible for achieving. However, formatting rules can vary widely between applications and fields of interest or study. Inflation targeting requires that a decision be made on what price stability means in practice. It puts too much weight on inflation relative to other goals 2. Inflation targeting has become a dominant framework for monetary policy over the. The inflationtargeting debate volume 32 national bureau. Full ebook the inflationtargeting debate for free video. Inflation targeting it has gained much traction over the past two decades, becoming a framework of reference for the conduct of monetary policy. The volume opens with a discussion of the optimal formulation of inflationtargeting policy and continues with a debate about the desirability of such a model for the united states. Inflation targeting is a sometimes nebulous phrase used to describe a monetary policy style which, at its heart, has the central bank setting an explicit, longrun, numeric target for. Empirical methodology stochastic convergence suggests that any difference between series that are. The united kingdom adopted inflation targeting in october 1992 after exiting the european exchange rate mechanism. As the name suggests, in such inflationtargeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. The rationale for inflation targeting federal reserve bank of new part i.
Lights from a metaregression analysis, imf working papers 172, international monetary fund. The research was based on the period prior to inflation targeting and the period of inflation targeting. This is under debate within the fed, since inflation targeting is usually very successful in other countries because of its transparency and predictability to the. The fact that not all central banks that state price stability among their goals of monetary policy have chosen an inflation targeting framework is indicative of the fact that it is not clear whether the benefits of inflation targeting exceed its costs. Inflation target reduces flexibility placing any number on an inflation objective however much it would be surrounded with caveats. Jul 10, 2019 this monetary tool seeks that sweet spot of inflation between 2% and 3%. When used with the feds other tools, inflation targeting also lowers the unemployment rate and keeps prices stable.
Canada was the second country to formally adopt inflation targeting in february 1991. They seem to focus mainly on bringing inflation into the single digits and maintaining financial stability. Introduction to the inflation targeting debate, nber chapters, in. One is consumer price index or cpi and the other is wholesale price index or wpi. The inflationtargeting debate, pages 110, national bureau of. Making sense of the inflation targeting debate in south africa duration. In general, central banks normally follow a policy of keeping inflation sufficientl. Mishkin graduate school of business, columbia university and national bureau of economic research may 2005 john kuszczak memorial lecture at the bank of canadas annual conference, issues in inflation targeting, ottawa, april 2829, 2005. The results are far from conclusive with the evidence.
This concise book analyzes key economic and monetary trends since the financial crisis 200809, specifically investigates the reasons why monetary stimulus has largely failed to steer inflation as desired, and offers recommendations for achieving an effective monetary policy in the modern age. Svensson, 2011, substantial evidence has been produced on the effects of inflation targeting on the inflation rate, its volatility, and output growth, focusing on both the time series and the cross sectional dimension. Oclcs webjunction has pulled together information and resources to assist library staff as they consider how to handle coronavirus. Over the past fifteen years, a significant number of industrialized and middleincome countries have adopted inflation targeting as a framework for. The central bank uses interest rates, its main shortterm monetary instrument. They needed to after the bretton woods international monetary system collapsed. Feb 07, 2020 the volume opens with a discussion of the optimal formulation of inflation targeting policy and continues with a debate about the desirability of such a model for the united states. Read the inflationtargeting debate for kindle video. Over the past fifteen years, a significant number of industrialized and middleincome countries have adopted inflation targeting as a framework for monetary policymaking.
Looking at a short and extraordinary period of five years is risky if one. The assumption is that the best that monetary policy can do to support longterm growth of the economy is to maintain price stability. Inflation targeting is a monetary policy framework in which the central bank announces an explicit inflation target and implements policy to achieve this target directly. The inflation targeting debate, national bureau of economic research studies in business cycles, university of. So now i understand what inflation targeting is, but what are its costs and benefits. Fourth, till very recently india did not have a pan. In recent years, monetary economists and central bankers have expressed growing interest in inflation targeting as a framework for implementing monetary policy. The article shows the free banking versus 100percent debate can do without the problem of inflation when defined as mises does.
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