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

Is inflation targeting passé?In sum, it is particularly difficult for central banks to determine what a plausible nominalGDP target path would look like in the immediate aftermath of a financial bubble. Allthat we can say is that it is surely below and probably flatter than the pre-Crisis growthpath of nominal GDP. While it seems plausible that many economies are below thatpath, by how much is anybody’s guess. My suspicion is that the distance is smallerthan commonly thought. Adopting nominal-GDP targeting now would bring with it anobvious risk of inflation much above the level central banks typically target.A further drawback with nominal-GDP targeting is that the necessary national accountsdata are available only with substantial lags and are frequently revised. It is thereforedifficult to determine in real time to what extent the objective of policy is met.Overall, temporarily switching to a policy of targeting the level of prices or nominalGDP would not seem sensible in the current setting.Policy and ‘rare’ eventsThe recent financial Crisis is a once-in-a-lifetime episode. The world economy has notfaced a situation of coincident slowdown of this magnitude and geographical reachsince the early 1930s. Given the extreme infrequency of this type of event and the lackof plausible alternative frameworks, should central banks announce that in crisis timesthey may deviate temporarily from the prescriptions of inflation targeting?In practice, it would be difficult to spell out in detail under what conditions centralbanks would do so and when they would exit from any provisional arrangements. Theresulting subjectivity is an open invitation for public and political pressure for moreexpansionary monetary policy whenever a business cycle downturn occurs.Furthermore, central banks have already responded flexibly and on a massive scaleduring the current Crisis. The scope and size of unconventional policy measuresemployed is unprecedented. As noted by Mishkin (2011), while the shock to the41