P248 inflation targeting(2)

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