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

Introductionuntil unemployment fell to 6.5%, or forecast inflation rose above 2.5% – provided longterminflation expectations remained anchored.Another suggestion for boosting monetary policy’s effectiveness is to switch thestrategic goal from price stability to nominal-GDP stability. This has not yet been triedby any central bank, and it elicited sharp disagreement among our authors.Some authors viewed it as an important step to restoring growth. As Jeffery Frankelwrites in his chapter: “Phasing in nominal-GDP targeting delivers the advantage ofsome stimulus now, when it is needed, while respecting central bankers’ reluctance toabandon their cherished inflation target.” Michael Woodford argues that switching to anominal-GDP target would be a transparent and easily communicated way of combinginto a single target central banks’ two underlying goals (low inflation and normalgrowth).Other authors argue that nominal-GDP targeting differs little from flexible inflationtargeting. Central banks have long worried about inflation and growth, so they all havebeen – de facto – pursuing some form of nominal-GDP growth. These authors use thispoint to argue against a formal switch.A third group of authors saw such a switch as doing great harm in the worst case anddoing little good in the best case (relative to flexible inflation targeting). Karl Whelan,Adam Posen, Charles Wyplosz, Steve Cecchetti, Charles Goodhart and Lorenzo BiniSmaghi oppose a switch to nominal-GDP targeting. In their chapter, Charles Goodhartand co-authors spotlight two main shortcomings:• First, private-sector uncertainty about the economy’s real growth path gets piled onto uncertainty about price growth.In this way, nominal-GDP targeting directly undermines the strategy goal of anchoringinflation expectations.• Second, choosing a nominal growth rate is plagued with difficulties.19