P248 inflation targeting(2)

Who killed the inflation target?Lorenzo Bini SmaghiHarvard UniversityIs inflation targeting working? Should we get rid of it? This column discusses whatinflation targeting can achieve, the limitations on central banks in the struggle forreigniting growth, and the pros and cons of abandoning inflation targeting altogether.Despite its problems, the advantages to ending inflation targeting remain, on balance,relatively unclear.Inflation targeting has not worked. It has not prevented the financial Crisis. It is notproviding an efficient monetary-policy strategy to get the economy out from the Crisis.Should we get rid of it?Much has been written about how inflation targeting should be improved with a viewto taking both financial conditions more into account and ensuring greater consistencybetween price stability and financial stability (preventing the type of asset-price bubblewe experienced before the Crisis). Lars Svensson, for instance, has made severalproposals on how to make inflation targeting more ‘flexible’(e.g. 2011).I would like to focus here on whether inflation targeting can remain a useful strategy topromote economic recovery and price stability after the bubble has burst, especially inthe current post-Crisis environment.The key policy interest rate and inflation targetingThe main characteristic of inflation targeting is a transparent relationship between themonetary-policy instrument – i.e. the key policy interest rate – and the target – i.e. the31