P248 inflation targeting(2)

A broader mandate: Why inflationtargeting is inadequateKarl WhelanUniversity College DublinThe Crisis has ruined inflation targeting’s ‘wonder drug’ reputation. This columnargues that central banks should have a broad mandate that incorporates financialstability, good macroeconomic performance, and a target for price stability that isconsistent – as far as possible – with their other goals. The elegant theories that showfixed rules to be best are intellectually attractive, but not particularly good guides toreal-world policymaking.Recent years have severely tested central bankers. In response to severe recessionsand financial crises, they have adopted policies that have fitted uneasily with inflationtargeting, the dominant policy framework for the last 20 years. This raises the question:Is the current period of central bank practice an anomaly, soon to be followed by areturn to normal service, or does the Crisis point towards the need to consider wholesalechanges to how central banks conduct their business?In this essay, I discuss the future of central banking by addressing questions relatedto financial stability, macroeconomic stability and price stability. Overall, I argue thatthe events of recent years combine with economic theory to make a case against pureinflation-targeting regimes.104