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

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Is inflation targeting dead? Central Banking After the CrisisWhen reviewing the intellectual rationale for inflation targeting regimes, it is worthconsidering the limited nature of the underlying theoretical framework.• It takes no account of the role played in the economy by the financial sector.• It provides no explicit guidance as to which definition of price stability to committo.• It emphasises gains that relate to a long run of uncertain timing.Taken together, these problems have hampered the ability of inflation-targeting centralbanks to perform effectively in recent years.Financial stabilityInflation targeting regimes saw the completion of a long transition for central banksin which they moved away from their original roles as lenders of last resort to thebanking system. The recent Crisis has seen a complete reversal of this long transition.Central banks around the world have provided huge quantities of emergency liquidityto the financial sector. The period of emergency provision has now ended in the US,but the European banking sector has not yet recovered. The ECB is still providing largeamounts of financing to prevent a collapse.The enormous disruption caused by the global financial Crisis – and the fact thatcentral banks were the only organisations that could step in to prevent an even deepercatastrophe – argues strongly in favour of restoring financial stability goals to an evenfooting with macroeconomic goals such as price stability.We now know enough to be sure that the widespread presumption that low inflationis, in and of itself, conducive to financial stability has been shown to be complacent.Elevating financial stability to be among a central bank’s primary goals will help toensure that future expansions don’t see policymakers taking a hands-off approach tocredit booms simply because inflation is low and seems likely to stay so. It will alsomake it easier for central bankers to act in a crisis by taking the necessary steps to avert106
A broader mandate: Why inflation targeting is inadequatedisaster, while accepting that one consequence of such actions may be an increase ininflation over the medium term.Macroeconomic stabilityDuring the inflation targeting era, it was common to hear central bankers with single,price-stability oriented mandates scolding the Federal Reserve for its dual mandate thatalso obliges it to focus on the real economy.I am not sure that the evidence for gains from inflation-targeting mandates wereever that strong. Ball and Sheridan (2004) concluded there was little difference inthe macroeconomic performance of inflation targeters relative to those that did notadopt explicit targets. Others, such Gurkaynak et al (2007), have focused on the moreapparent anchoring of long-term inflation expectations in countries that have adoptedinflation targeting.Still, inflation expectations in the US have generally remained at low levels despite theabsence of the various pieces of inflation targeting apparatus. And a comparison of theFed and the ECB’s current responses suggests the absence of an output-related mandatecan have a serious impact on the conduct of policy.As I write, the US economy is growing and unemployment is falling. The Eurozoneis in recession and unemployment is rising to record levels. Despite this, the Fed isholding short-term interest rates at zero while the ECB’s policy rate is 75 basis points.The Fed is promising to keep rates low for some time; the ECB is generally understoodto want to raise rates if they observe any sign of an increase in inflation. This is whatthey have done twice during Europe’s current economic crisis (in 2008 just before theLehman’s bankruptcy, and summer 2011, right before the most serious intensificationof the Eurozone Crisis).Similarly, in contrast the Fed’s ongoing programme of large-scale bond purchases, theECB’s bond purchase programmes have been of a limited stop-start nature, with the107
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Is Inflation Targeting Dead?Central
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ContentsForewordviiIntroduction 10L
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ForewordSince the onset of the Glob
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ForewordThe limits of monetary poli
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Introduction• Perpetrator: Inflat
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Introductionboth transparent commun
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Introduction• Financial crises of
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IntroductionThis posed a novel prob
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Introductionuntil unemployment fell
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Introductionbalance-sheet impairmen
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Introduction• Consideration of su
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Introductionenhance actual growth,
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Introductionrather than interpretin
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IntroductionConcluding remarksInfla
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Who killed the inflation target?Lor
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Who killed the inflation target?How
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Who killed the inflation target?red
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Is inflation targeting passé?Stefa
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Is inflation targeting passé?Raisi
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Is inflation targeting passé?In su
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Monetary targetry: Might Carneymake
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Is inflation targeting dead? Central Banking After the Crisis - Vox

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