Is inflation targeting dead? Central Banking After the Crisis - Vox

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IntroductionLucrezia Reichlin and Richard BaldwinLondon Business School, Graduate Institute and CEPRWhat this eBook doesBefore the Crisis, inflation targeting had become the de facto standard frameworkfor monetary policy. Many central banks around the world had adopted some form ofinflation targeting. Even the ECB and the Federal Reserve, which cannot be defined in astrict sense as inflation targeters, had built their frameworks for monetary policy aroundthe idea of commitment to a quantitative objective for medium-term inflation.The financial Crisis of 2008 and the recession which ensued challenged this consensuson best practice on monetary policy. Central banks experimented with new tools to dealwith a wide range of problems related to the difficulty of stimulating the economy whenthe policy interest rate is near zero and when the economy is deleveraging as well asproblems of financial stability and of liquidity shortage.As former ECB Executive Board member Lorenzo Bini Smaghi writes in his chapter:“Inflation targeting did not prevent the financial Crisis or provide sufficient stimulus toget the economy out from the Crisis.”But what caused what? Inflation targeting is cast alternatively as perpetrator, innocentbystander, or saviour.10
Introduction• Perpetrator: Inflation targeting made monetary policy too easy before the Crisis andinsufficiently so since. 1 It helped build the Crisis in the 2000s and today hinders theclean-up.• Bystander: The regime was like a coastal schooner finding itself in the path of HurricaneSandy. Inflation targeting was developed during ‘the Great Moderation’. Noone ever claimed it was robust enough to deal with a five-year sequence of once-ina-lifetimecrises.• Saviour: Things would have been much worse without inflation targeting’s anchoringof expectations. 2 “While the shock to the financial system has been more complexthan that which led to the Great Depression, the decline in output has been farless marked”, as Stefan Gerlach writes in his chapter.But is the framework of inflation targeting adequate to deal with the Crisis today? Arethe policy tools used recently such as quantitative easing, credit easing, and liquidityprovision – or even helicopter money – compatible with inflation targeting, or shouldwe scrap it? Should we keep some of its essential elements and put more content intothe notion of flexible inflation targeting which many central banks had identified astheir approach before the Crisis but many of whose details remained undefined?The Bank of Japan’s recent bold departure is a timely demonstration of how urgent andradical this debate has become. On a more speculative basis, Adair Turner has recentlysuggested that permanent creation of money (helicopter money) should be consideredas one of the options for monetary policy. At a recent CEPR event, Adair Turner andMichael Woodford discussed this view and compared it with other forms of coordinatedmonetary- and fiscal-policy interventions (QUOTE).In early 2013, we asked 14 world-renowned scholars, practitioners and marketparticipants to share their wisdom on: “Central banking after the Crisis: Is inflation1 See for example, Borio and Lowe (2002), and Taylor (2012). This phrasing is due to Huw Pill.2 See the chapter by Ryan Banerjee, Stephen Cecchetti and Boris Hofmann.11
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Page 5 and 6: ContentsForewordviiIntroduction 10L
Page 7 and 8: ForewordSince the onset of the Glob
Page 9: ForewordThe limits of monetary poli
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Page 29 and 30: IntroductionConcluding remarksInfla
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The evolution of modern centralbank
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Inflation targeting: Fix it, don’
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Nominal-GDP targets, without losing
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A broader mandate: Why inflationtar
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Will central banking change?Charles
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Challenges to inflation targeting a
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