P248 inflation targeting(2)

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Introductionrather than interpreting the slow recovery as a failure of monetary policy, it may simplyindicate that the magnitude of the shock has exhausted the capability of monetarypolicy to stimulate demand. Growth also requires structural reforms in the labour,goods and capital markets as well as bank recapitalisations. These are the responsibilityof governments, parliaments and regulators.Bottom line: Inflation targeting, refined not replacedWe started our introduction by asking whether inflation targeting is dead. In a narrowsense, the answer’s obvious – it’s been dead since central bankers started innovatingin 2008. Central bankers dealt with the Crisis by developing new tools and, at least insome cases, putting more emphasis on growth and financial stability. The emphasis ongrowth comes to the realisation that inflation stabilisation is not associated with outputstabilisation in the short run, and the short run may last for quite a while in economieswhich are dealing with a debt problem.Notice however that inflation targeters were never indifferent to growth. Growth andjobs mattered only to the extent that a commitment to a medium-term objective in termsof inflation remains credible. While this is certainly still true in the rhetoric, some – theFed and Bank of Japan for example – seem to be shifting priorities. They increasinglyact as if nothing will work without a healthy economic recovery. This is what MohamedEl-Erian calls the ‘reverse Volker moment’, referring to Volker’s switch in the early1980s to an inflation-is-all-that-matters approach.In addition to the medium-run inflation target, central banks have implicitly or explicitlyembraced a second goal – financial stability. 7 With a second goal came different tools.Almost all central banks added macroprudential policies to their toolkit. Many alsostarted using their balance sheets in new ways. Not to create money as before, but toundertake ‘market making’ interventions in key financial-market segments. It remains7 In most nations, responsibility for the second goal is shared with regulatory authorities.27
Is inflation targeting dead? Central Banking After the Crisisto be seen whether the monetary-policy objective and the financial-stability objectivewill not conflict with one another.Inflation targeting: Fix it, don’t scrap it“Flexible inflation targeting has survived the test of a major financial crisis well,”writes Charles Wyplosz summing up a view broadly held by the authors. Karl Whelandissents. But even he objects on the grounds of tactics, not strategy.”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.”He argues that central banks should be given a broad mandate that incorporates financialstability and good macroeconomic performance as well as a target for price stability.Ben Broadbent’s conclusion can be read as a rejoinder: “offering multiple alternativesto inflation targeting comes close to offering none at all -- a policy of pure discretion.”For decades, the UK tried monetary policy without a real anchor. “One can’t say itworked out that well.” This brings us to the ultimate defence.There is no viable alternativeAs Jeffery Frankel puts it: “We have learned little from the Crisis that alters ourunderstanding of how monetary policy should be conducted. There is no reason todiscard inflation targeting and similar policy strategies, in particular since they have noobvious alternatives.”“If we thought that we had learnt anything from the travails of the 1960s and 1970s,”says Charles Goodhart, “it was that monetary expansion in the medium and longer rundoes not bring faster, sustainable growth. … The long-run Phillips curve is vertical.It was on this analytical basis that the case both for central-bank independence and aspecific inflation target was made.” That case is as true now as it ever was.28
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Inflation targeting: Fix it, don’
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Nominal-GDP targets, without losing
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Reviving ‘money and banking’Mar
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Fourteen world-renowned scholars, p
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P248 inflation targeting(2)

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