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

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Is inflation targeting dead? Central Banking After the CrisisIn the case of the Eurozone, where the debt problem of the periphery is likely to last,this credit risk on the ECB’s balance sheet may eventually require printing money andgenerating inflation. With or without inflation the situation is one in which the centralbank does not act independently and may lose that credibility, which is its fundamentalanchor.In such cases, a better alternative would be to explicitly recognise the fundamentalconnection between fiscal and monetary policy which is deliberately obscured innormal times but which surfaces when the economy faces a debt problem. This requireseither tolerating higher inflation temporarily by redefining the notion of medium termin a very flexible interpretation of inflation targeting, or redefining the target and thecommunication associated with the policy designed to achieve it as recently done bythe Federal Reserve (a version of this policy would be nominal GDP targeting). Theessential goal is to preserve the anchor and the independence of the central bank to acteven in recognition of the fiscal implications of its policies, not to preserve inflationtargeting as we have known it in normal times. However, a key challenge in suchsituations is not to kill the incentives for governments to act on solvency issues.ReferencesLenza, M, H Pill and L Reichlin (2010), “Monetary policy in exceptional times”,Economic Policy 25, 295-339.Giannone, D, Lenza, M Pill and L Reichlin (2012), “The ECB and the interbankmarket”, The Economic Journal, forthcoming.Giannone, D, Lenza, M and Reichlin, L (2013), “Money, credit, monetary policy andthe business cycle: has anything changed since the crisis?”, London Business School,January, mimeo.138
Challenges to inflation targeting after the crisisAbout the authorLucrezia Reichlin is Professor of Economics at the London Business School, ResearchDirector at CEPR, and non-executive director at Unicredit Banking Group. She servedas Director General of Research at the ECB (March 2005 to September 2008), andwas Chairman and Scientist-in-Charge of the Euro Area Business Cycle Network(EABCN). She is a member of scientific advisory boards for a number of institutions,and she is co-editor of the Journal of Applied Econometrics. Having received herePhD in Economics from New York University, she has published numerous paperson econometrics and macroeconomics. Her papers have appeared in The AmericanEconomic Review, Review of Economic Studies, Review of Economics and Statistics,and Journal of the American Statistical Association.139
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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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Monetary targetry: Might Carneymake
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The evolution of modern centralbank
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Inflation targeting: Fix it, don’
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Is inflation targeting dead? Central Banking After the Crisis - Vox

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