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

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Is inflation targeting dead? Central Banking After the CrisisFive years of central bankers’ inventiveness and courage solidify confidence in thesystem – confidence that mature economies can get back to the pre-Crisis normalwithout another Great Depression or violating confidence in price stability.• Pessimistic: Inflation targeting has sown the seeds of its own destruction.By loading up their balance sheets, central banks risk blurring monetary and fiscalpolicy. The consequences for their own independence are potentially disastrous.Which interpretation is right? The answer, as usual, is – it depends. It depends on howcentral banks and other policymakers react going forward.What is to be done? Defending credibilityInflation targeting without confidence is just an empty promise, and confidence is atrisk. Can we still be sure that central banks’ have the right incentives to defend pricestability at any cost? The challenges may fix themselves. If markets and the economyrecover strongly, solvency problems will melt away. The massive purchases of assetswill look like wise investments. But we cannot count on this. According to our authors,solutions to the game-of-chicken and balance-sheet problems fall into two bins:• Changes that require the cooperation of governments; and• Changes central banks can undertake unilaterally.Both should be tried.Broadening the Crisis-fighting teamMohamed El-Erian and Lorenzo Bini Smaghi make the case for the first approach –central banks need more support from politicians. As Mohamed El-Erian puts it:“It is critical that the current phase of unusual central-bank activism give way to a moreholistic policy response; and one that involves other policymakers with direct tools to24
Introductionenhance actual growth, increase growth capacity, overcome debt overhangs, improvelabour-market functioning, and restore a proper system of housing finance.”Central banks are ill-equipped to deal with debt problems, structural problems andcompetitiveness problems. Political leaders need to get regulators and fiscal authoritiesto take responsibility for fixing debt problems and structural problems. According tothis view, central banks’ are no longer masters of their own fate; the second approachis more sanguine.CredibilityWoodford argues for the second approach – tactics for fortifying central-bankcredibility. Central banks should buttress inflation targeting with a much more detailed,much more transparent monetary policymaking procedure. Central banks should useforecast-targeting procedures as the basis of their monetary policy deliberations. Andthey should regularly explain how their decisions are consistent with these procedures.This should help convince economic actors that the economy will get through the Criseswithout runaway inflation.While this thinking has been heard before, Woodford and Frankel argue that it isespecially critical now. Central banks have adopted policies that fit uncomfortablywith medium-run inflation targeting – raising doubts about their motives. An explicitcommitment to formal decision procedures could banish the doubts.Thinking about balance-sheet exit strategiesThe current level of central-bank activism is not normal – especially not the large assetholdings. Using the ECB as an example, Huw Pill writes in his chapter: “The currentsituation is marked by an excessive reliance on the ECB and its fiscal resources. …Using the ECB’s fiscal capacity more proactively now undermines the credibility ofattempts to limit recourse to that capacity in the future.”25
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Page 5 and 6: ContentsForewordviiIntroduction 10L
Page 7 and 8: ForewordSince the onset of the Glob
Page 9 and 10: ForewordThe limits of monetary poli
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Page 19 and 20: Introductionuntil unemployment fell
Page 21 and 22: Introductionbalance-sheet impairmen
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Page 29 and 30: IntroductionConcluding remarksInfla
Page 31 and 32: Who killed the inflation target?Lor
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Page 66 and 67: The evolution of modern centralbank
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Inflation targeting: Fix it, don’
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Nominal-GDP targets, without losing
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A broader mandate: Why inflationtar
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Will central banking change?Charles
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Is inflation targeting dead? Central Banking After the Crisis - Vox

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