P248 inflation targeting(2)

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Cheap talk is no alternative to inflation targetingerror bands for inflation that are wider and more difficult to interpret. Alternatively, ifyou think you are going to hit the nominal-GDP target, the error band of how much ofit is going to be new growth versus inflation would be extremely wide. The net effectwould be to increase the volatility of inflation by a large measure. This does not seemlike an improvement when you have been targeting an inflation rate with reasonableaccuracy.The point is simple to illustrate with an example. Say we have very slow growth, aswe do now – perhaps because of the Eurozone Crisis, financial factors, and/or fiscalausterity. With a nominal-GDP target of, say, 5%, you end up with an inflation rate of3% or 4% as an intentional policy. But In this case, the markets will rightly say, “Ohmy god, this is a much less credible inflation regime. The government and the centralbank are consciously choosing a higher inflation rate than they have been for years.”The likely outcome, in my opinion, is that you will get higher inflation and lose theanchoring effect of inflation targeting that my Bank of England colleagues and Icounted on. When inflation shot up to 5%, people expected it would come back downto 2% – as it did, broadly speaking.The lack of stimulus impact is not the fault of inflationtargetingInflation targeting was not the reason why quantitative easing failed to achieve the strongrecovery we hoped for and though was possible. I do believe quantitative easing wasreasonably effective and, for various political reasons, some other forms of quantitativeeasing that I think could have added to effectiveness were not pursued (Posen 2012).But the reason they were not pursued had nothing to do with the inflation target. Theyhad to do with governance, organisational decisions and ideological beliefs on the partof central bank committee members. They were never argued against such measures onthe basis of: “We can’t do that because that will be contrary to target.”63
Is inflation targeting dead? Central Banking After the CrisisConclusionTalk about alternatives to inflation targeting is, to me, a result of frustration – the lackof recovery despite massive monetary-policy shifts. But to my mind, the frustrationis misdirected. Sifting a central bank’s target from inflation to nominal GDP in noway changes the effectiveness of policy instruments. Either quantitative easing worksthrough the channel of promoting confidence, promoting asset prices, promotingaggregate demand and reallocation of the riskier assets, like all monetary policy, or itdoes not. If it does not do that, then it does not do that for nominal GDP any more thanit does for inflation.The fact is we could have pursued more aggressive monetary policy, achieved bettergoals and been totally consistent with the current inflation target. There is no need toincur all the risks, dangers, and confusion of switching regimes – especially not to aregime like nominal-GDP targeting, which lacks inflation targeting’s robustness.Forward guidance is no substitute for sufficient policy action.ReferencesCarney, Mark, (2012), Speech presented to: CFA Society Toronto, in Toronto, Ontario,December 11.Hellebrandt, Tomas, 2013. “Why the United Kingdom Should Adopt a Nominal GDPTarget”, PIIE Real Time Economic Issues Watch, March 21,Joyce, Michael, David Miles, Andrew Scott, Dimitri Vayanos, 2012. “QuantitativeEasing and Unconventional Monetary Policy – an Introduction,” The Economic Journal122 (564): F271–F288, NovemberPosen, Adam, 2012. “Discussion of Methods of Policy Accommodation at theInterest-Rate Lower Bound” presented at FRBKC Economic Policy Symposium on theChanging Policy Landscape, Jackson Hole, WY, August 31.64
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ForewordSince the onset of the Glob
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IntroductionLucrezia Reichlin and R
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Flexible inflation targeting:Perfor
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Will central banking change?allowed
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Will central banking change?unemplo
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Challenges to inflation targetingaf
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Fourteen world-renowned scholars, p
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P248 inflation targeting(2)

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