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

Is inflation targeting passé?Stefan GerlachCentral Bank of Ireland and CEPRSome claim that inflation targeting is passé. This column argues that the Crisisspotlighted some insufficiencies in inflation targeting, but provide no important lessonon how monetary policy per se should be conducted. The answer is not to abandoninflation targeting for untested alternatives. Central banks should instead focus onensuring they have effective unconventional monetary-policy tools.As a consequence of the financial Crisis, it has been argued that inflation targetingand related monetary-policy strategies in which price stability is the primary policyobjective have become passé. Two prominent claims have been made:• First, by focusing excessively on stabilising inflation, central banks disregarded thefact that expansionary monetary policy led to credit-fuelled property-price bubblesin a number of countries;According to this view, the Crisis was partially a monetary-policy error.• Second, inflation targeting can prevent central banks from responding vigorously toweak economic growth in the aftermath of a bubble;In the interest of brevity, here I will focus on the second claim. Let me neverthelesssay that I believe that the first charge is largely incorrect. While low interest rates didlead to a ‘search for yield’ in financial markets, weaknesses in financial firms’ riskmanagement and in financial regulation and supervision were much more importantthan monetary policy in setting the stage for the Crisis. There is now much agreementthat macroprudential policy – loosely described as ‘non-interest rate policy’ – shouldbe used to constrain the financial system when policy-controlled interest rates are low.37