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

Will central banking change?Charles WyploszGraduate Institute, Geneva, and CEPRWho says we should quit inflation targeting? This column argues that flexible inflationtargeting has survived the test of a major financial crisis well. Indeed, the Crisis isarguably a failure of supervision, not of monetary policy. As for any rule, there aretimes when inflation targeting is inconvenient and possibly counter-productive. But itremains that the alternatives – monetary targeting, nominal-GDP targeting, no explicitstrategy at all – would probably not have done a better job.After the Great Crisis, there is no lack of potential culprits: the banks, the hedge funds,the supervisors, global imbalances and, of course, central banks. Taylor (2010) blamesthem for having kept interest rates too low for too long. Goodhart and Hofmann (2008)see monetary policy as responsible for housing-price bubbles. Then, during the Crisis,once interest rates have been driven to the lower bound, central banks multiplied thesize of their balance sheets by a factor of three, four or more. Looking at these and otherevents, Frankel (2012) writes: “it is with regret that we announce the death of inflationtargeting.” We shouldn’t be so sure. As any strategy, inflation targeting is meant tobe applied year in, year out; as any rule, there are times when it is inconvenient andpossibly counter-productive. Yet that is no proof that the strategy is flawed.Macroeconomic vs microeconomic concernsThe charge that inflation targeting is responsible for the financial Crisis is notparticularly convincing. To start with, in the US – where it all began – the FederalReserve was not an inflation targeter. In other countries where housing bubbles were120