P248 inflation targeting(2)

Is inflation targeting dead? Central Banking After the Crisisdead. Economists set themselves too easy, too useless a task if in tempestuous seasonsthey can only tell us that when the storm is past the ocean is flat again.”My concern is that inflation-targeting regimes can restrict central banks in their abilityto get us out of storms, while their long-run benefits are perhaps smaller than advertised.Goals and instrumentsI have argued that rather than inflation targeting regimes being an optimal framework,central banks should be given a broad mandate that incorporates financial stabilityand good macroeconomic performance, as well as a target for price stability that isconsistent, as far as possible, with their other goals.One obvious response to this position is that it suffers from the ‘Tinbergen problem’– too many goals and not enough instruments. On this, I would make two comments.• First, the Crisis has shown that central banks have more tools than the short-terminterest rate, and some of these newer tools need to remain part of the armoury.Central banks need to focus on many different areas and to be ready to use differenttools to deal with different problems.• Second, who ever said macroeconomic policymaking is easy? Simple theoreticalmodels that suggest fixed rules are best may be superficially attractive, but they arerarely good guides to reality.Macroeconomic outcomes are the result of millions of people interacting in a complex,ever-changing world. The history of the gold standard and the Great Depression –as documented by Eichengreen (1996) and others – serves as a useful lesson on thedangers of persevering with a rigid policy framework that corresponded to a prevailingorthodoxy.110