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

Is inflation targeting dead? Central Banking After the Crisistechnological innovation may slow and demographic developments will be adverse.So, if we wanted to maintain price level stability, with inflation at 2%, we should beconsidering a nominal GDP growth target of slightly under 4%. That is not what theadvocates of such a target propose.Given our uncertainty about sustainable growth, an NGDP target also has the obviousdisadvantage that future certainty about inflation becomes much less than under aninflation (or price level) target. In order to estimate medium- and longer-term inflationrates, one has first to take some view about the likely sustainable trends in future realoutput. The latter is very difficult to do at the best of times, and the present is notthe best of times. So shifting from an inflation to a nominal GDP growth target islikely to have the effect of raising uncertainty about future inflation and weakening theanchoring effect on expectations of the inflation target.ConclusionIf we thought that we had learnt anything from the travails of the 1960s and 1970s,it was that monetary expansion in the medium and longer run does not bring faster,sustainable growth. If anything, the opposite is true; faster inflation, at any rate beyondsome threshold, deters growth. The long-run Phillips curve is vertical. It was on thisanalytical basis that the case both for Central Bank independence and a specific inflationtarget was made.Editors’ note: Copyright 2013 Morgan Stanley. Please note that materials that arereferenced here are intended for informational use only, so please do not forward thecontent contained herein. If you should have a need to use/share the materials externally,please send an email to permission@voxeu.org. Additionally, MS and VoxEU.org haveprovided their materials here either through agreement or as a courtesy. Therefore, MSand VoxEU.org do not undertake to advise you of changes in the opinions or informationset forth in these materials. You should note the date.48