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

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Is inflation targeting dead? Central Banking After the Crisisnot-yet-operational Outright Monetary Transaction (OMT) programme brought intobeing only when the very existence of the euro itself was under threat.Overall, I think the Crisis has weakened the case for central banks to be given a single,price-stability mandate and broadened the case for them to be given a wider set ofprimary goals that would include macroeconomic stability.Is the 2% inflation target too low?These arguments are not to deny the importance of central banks having a transparentand clear medium-term objective for price stability. But it is not at all clear why thisgoal has to be phrased as an inflation target, and it’s even less clear why that inflationtarget should equal the almost universally accepted standard of 2%.Personally, I believe recent experience points to 2% being too low. In the period sincethe 2% standard became widely accepted in the 1990s:• The global economy has had two periods of recession; in both, deflation becameeither a reality or a threat across a number of advanced economies.• We know now that the liquidity trap is not a theoretical curiosity.Economies that operate at a 2% average rate of inflation are one recession away fromthe difficulties associated with falling into that trap.Set against these dangers, I don’t know of a single study that can explain how the socialcosts of a steady inflation rate of 3% or 4% would offset the reduced risk of deflationdue to such a low target rate.Should the targeting be price changes or price levels?It is also worth noting that even the leading pre-Crisis theoretical approach that waswidely used to analyse inflation-targeting regimes does not propose inflation targeting108
A broader mandate: Why inflation targeting is inadequateas an optimal regime. 1 Rather, the optimal policy under commitment in this model takesa form of price-level targeting, with past shocks to inflation still influencing today’spolicy.A price-level targeting approach would leave all the major central banks with morewiggle room for adjustment than they are currently allowing themselves. However,there is little sign of this approach taking hold in the major central banks.Even Ben Bernanke, who recommended price-level targeting to the Bank of Japan inhis early days as Fed Governor (Bernanke, 2003), now rejects it on the grounds that itwould undermine anti-inflationary credibility. 2 It is true that the communication task ofa central bank is made somewhat more complex by the adoption of a price level target,but overall I believe its advantages outweigh this disadvantage.Long-run gains: “… too easy, too useless a task … “Without doubt, the advocates of inflation targeting believe they are doing the rightthing. They believe being vigilant in focusing primarily on enforcing a low rate ofinflation and the long-run benefits of anchored inflation expectations will offset anyshort-term gains stemming from increased flexibility.Here, Keynes’s aphorism about the long run comes to mind. But well known as thephrase is, what is less well known is its context. It appears in Keynes’s 1924 Tract onMonetary Reform as part of a discussion of the quantity theory of money. The fullquote is: “The long run is a misleading guide to current affairs. In the long run we are all1 This is the New-Keynesian model popularised by Michael Woodford (2003) and others.2 From Bernanke’s April 2012 press conference: “I guess the question is, does it make sense to actively seek ahigher inflation rate in order to achieve a slightly increased reduction—a slightly increased pace of reduction in theunemployment rate? The view of the Committee is that that would be very reckless. We have—we, the Federal Reserve,have spent 30 years building up credibility for low and stable inflation, which has proved extremely valuable in thatwe’ve been be able to take strong accommodative actions in the last four or five years to support the economy withoutleading to an unanchoring of inflation expectations or a destabilization of inflation. To risk that asset for what I thinkwould be quite tentative and perhaps doubtful gains on the real side would be, I think, an unwise thing to do.”109
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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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