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

Is inflation targeting dead? Central Banking After the Crisisa low-inflation-low-employment state to a normal state (Eggertson and Woodford2003). Forward guidance is just being clear about which path the monetary authoritieswill pursue. By choosing an interest-rate path that triggers self-fulfilling expectations ofa recovery, forward guidance could restore money policy’s stabilisation power.For example Woodford has advocated that the central bank should commit to useinterest-rate policy (to the extent not constrained by the zero lower bound) to bringnominal GDP to a deterministic target path, higher than the previously expected path.This is a target path that may involve deviations from the inflation target in the shortterm but needs not to be in contradiction with a medium-term inflation target.As Woodford himself recognises, if people don’t see any immediate change in policy,but only statements about future policy, this strategy may lack credibility. This pointis forcefully made by Adam Posen, who helped set rates at the Bank of England. Hedismisses forward guidance as “a gimmick” – just one type of rhetoric that is not muchdifferent to others.So-called flexible inflation targeting – as practised by the Bank of England – is notfar from this notion. Flexible inflation targeting has always exploited the existence ofmultiple paths and used that leeway to stabilise economic activity to the extent it wasconsistent with the inflation target. The real difference lies in the explicitness of thecommunication strategies. Adam Posen points out that the Bank of England’s MonetaryPolicy Committee does not commit to interest-rate paths as a matter of principle – itapproaches each interest-rate decision afresh. The Fed, as we saw, routinely announcesa policy-rate path at its meetings.Altering targetsA third reaction to the loss of monetary-policy ‘punch’ has been to alter targets. InDecember 2012, the Fed switched from what most analysts viewed as a flexible inflationtarget to an explicit dual threshold. It announced that its policy rate would remain low18