Is <strong>inflation</strong> <strong>targeting</strong> dead?The costs of discretionThe question ‘is <strong>inflation</strong> <strong>targeting</strong> dead?’ should entail a positive answer to the questionabout what would have done (or would do) better. Too often it does not – or, if there isa proposed alternative, the answer seems to change according to the particular criticismbeing made. Nominal-income <strong>targeting</strong> is more forgiving of ‘cost’ shocks; a policythat paid more attention to asset prices might have reduced the severity of the financialCrisis; a greater focus on unemployment would mean a faster recovery today.As it happens, I think these points are often exaggerated. Except when there areforecastable changes in supply, or other costs, the difference between stabilisingnominal-GDP growth and a flexible <strong>inflation</strong> target are not that large; at least in the UK,tighter monetary policy would have done little to ward off the financial Crisis or limitits damage; nor am I convinced that the protracted weakness in Europe’s economies,since the Crisis, is solely the result of insufficiently easy monetary policy (or, moreparticularly, insufficiently high <strong>inflation</strong>).But a separate point is that, offering multiple alternatives to <strong>inflation</strong> <strong>targeting</strong> comesclose to offering none at all – a policy of pure discretion. Theory tells us unfettereddiscretion is usually suboptimal, however beguiling it may be in real time. We alsotried it, at length, in the UK: between Bretton Woods and <strong>inflation</strong> <strong>targeting</strong>, monetarypolicy had no real anchor (or none that endured for any time). One can’t say it workedout that well.ReferencesBean, C (2003), “Asset Prices, Financial Imbalances and Monetary Policy: Are InflationTargets Enough?”, speech given in Basel, Switzerland.Bean, C, Paustian, M, Penalver A and T Tim (2010), “Monetary policy after the fall”,speech given at Jackson Hole, Wyoming.57
Is <strong>inflation</strong> <strong>targeting</strong> dead? Central Banking After the CrisisBroadbent, B (2012), “Deleveraging”, speech given at Market News International,London.Frankel, J A (2012), “The death of <strong>inflation</strong> <strong>targeting</strong>”, VoxEU.org, 19 June.Svensson, L E O (2009), “Flexible <strong>inflation</strong> <strong>targeting</strong> – lessons from the financialcrisis”, speech given at workshop, “Towards a new framework for monetary policy?Lessons from the crisis”, organised by the Netherlands Bank, Amsterdam.Borio, C and P Lowe (2002), “Asset prices, financial and monetary stability: exploringthe nexus”, Working paper 114, Bank for International Settlements.Taylor, J (2012), “Monetary Policy During the Past 30 Years With Lessons for theNext 30 Years”, speech given at Presented at Cato Institute’s 30th Annual MonetaryConference on Money, Markets and Government: The Next 30 Years, 15 November.About the authorDr Ben Broadbent joined the Bank of England’s Monetary Policy Committee in2011. He was formerly an Economic Adviser at HM Treasury, and Assistant Professorof Economics at Columbia University from 1997-2000. For the decade prior to hisappointment to the MPC, Dr Broadbent was Senior European Economist at GoldmanSachs, during which time he researched and wrote widely on the UK economy andmonetary policy.Ben Broadbent graduated with a BA in Economics from Cambridge University in 1988,and in 1997 completed a PhD in Economics at Harvard University, where he was aFulbright Scholar.58
- Page 5 and 6:
Centre for Economic Policy Research
- Page 8 and 9: ForewordSince the onset of the Glob
- Page 11 and 12: IntroductionLucrezia Reichlin and R
- Page 13 and 14: Is inflation targeting dead? Centra
- Page 15 and 16: Is inflation targeting dead? Centra
- Page 17 and 18: Is inflation targeting dead? Centra
- Page 19 and 20: Is inflation targeting dead? Centra
- Page 21 and 22: Is inflation targeting dead? Centra
- Page 23 and 24: Is inflation targeting dead? Centra
- Page 25 and 26: Is inflation targeting dead? Centra
- Page 27 and 28: Is inflation targeting dead? Centra
- Page 29 and 30: Is inflation targeting dead? Centra
- Page 31 and 32: Is inflation targeting dead? Centra
- Page 33 and 34: Is inflation targeting dead? Centra
- Page 35 and 36: Is inflation targeting dead? Centra
- Page 37 and 38: Is inflation targeting dead? Centra
- Page 39 and 40: Is inflation targeting dead? Centra
- Page 41: Is inflation targeting dead? Centra
- Page 44 and 45: Is inflation targeting passé?Frank
- Page 46 and 47: Monetary targetry: Might Carney mak
- Page 48 and 49: Monetary targetry: Might Carney mak
- Page 50 and 51: Monetary targetry: Might Carney mak
- Page 52 and 53: Is inflation targeting dead?Ben Bro
- Page 54 and 55: Is inflation targeting dead?to rais
- Page 56 and 57: Is inflation targeting dead?to ‘l
- Page 60 and 61: Cheap talk is no alternative toinfl
- Page 62 and 63: Cheap talk is no alternative to inf
- Page 64 and 65: Cheap talk is no alternative to inf
- Page 66 and 67: Cheap talk is no alternative to inf
- Page 68 and 69: The evolution of modern central ban
- Page 70 and 71: The evolution of modern central ban
- Page 72 and 73: The evolution of modern central ban
- Page 74 and 75: The evolution of modern central ban
- Page 76 and 77: Inflation targeting: Fix it, don’
- Page 78 and 79: Inflation targeting: Fix it, don’
- Page 80 and 81: Inflation targeting: Fix it, don’
- Page 82 and 83: Inflation targeting: Fix it, don’
- Page 84 and 85: Inflation targeting: Fix it, don’
- Page 86 and 87: Inflation targeting: Fix it, don’
- Page 88 and 89: Inflation targeting: Fix it, don’
- Page 90 and 91: Inflation targeting: Fix it, don’
- Page 92 and 93: Nominal-GDP targets, without losing
- Page 94 and 95: Nominal-GDP targets, without losing
- Page 96 and 97: Reviving ‘money and banking’Mar
- Page 98 and 99: Reviving ‘money and banking’col
- Page 100 and 101: Reviving ‘money and banking’Thi
- Page 102 and 103: Reviving ‘money and banking’pro
- Page 104 and 105: Reviving ‘money and banking’200
- Page 106 and 107: A broader mandate: Why inflation ta
- Page 108 and 109:
A broader mandate: Why inflation ta
- Page 110 and 111:
A broader mandate: Why inflation ta
- Page 112 and 113:
A broader mandate: Why inflation ta
- Page 114 and 115:
Flexible inflation targeting:Perfor
- Page 116 and 117:
Flexible inflation targeting: Perfo
- Page 118 and 119:
Flexible inflation targeting: Perfo
- Page 120 and 121:
Flexible inflation targeting: Perfo
- Page 122 and 123:
Will central banking change?allowed
- Page 124 and 125:
Will central banking change?unemplo
- Page 126 and 127:
Will central banking change?About t
- Page 128 and 129:
Central banking after the crisis: C
- Page 130 and 131:
Central banking after the crisis: C
- Page 132 and 133:
Central banking after the crisis: C
- Page 135 and 136:
Challenges to inflation targetingaf
- Page 137 and 138:
Is inflation targeting dead? Centra
- Page 139 and 140:
Is inflation targeting dead? Centra
- Page 141:
Fourteen world-renowned scholars, p