P248 inflation targeting(2)

IntroductionLucrezia Reichlin and Richard BaldwinLondon Business School, Graduate Institute and CEPRWhat this eBook doesBefore the Crisis, inflation targeting had become the de facto standard frameworkfor monetary policy. Many central banks around the world had adopted some form ofinflation targeting. Even the ECB and the Federal Reserve, which cannot be defined in astrict sense as inflation targeters, had built their frameworks for monetary policy aroundthe idea of commitment to a quantitative objective for medium-term inflation.The financial Crisis of 2008 and the recession which ensued challenged this consensuson best practice on monetary policy. Central banks experimented with new tools to dealwith a wide range of problems related to the difficulty of stimulating the economy whenthe policy interest rate is near zero and when the economy is deleveraging as well asproblems of financial stability and of liquidity shortage.As former ECB Executive Board member Lorenzo Bini Smaghi writes in his chapter:“Inflation targeting did not prevent the financial Crisis or provide sufficient stimulus toget the economy out from the Crisis.”But what caused what? Inflation targeting is cast alternatively as perpetrator, innocentbystander, or saviour.10