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

Is inflation targeting dead?The costs of discretionThe question ‘is inflation targeting dead?’ should entail a positive answer to the questionabout what would have done (or would do) better. Too often it does not – or, if there isa proposed alternative, the answer seems to change according to the particular criticismbeing made. Nominal-income targeting is more forgiving of ‘cost’ shocks; a policythat paid more attention to asset prices might have reduced the severity of the financialCrisis; a greater focus on unemployment would mean a faster recovery today.As it happens, I think these points are often exaggerated. Except when there areforecastable changes in supply, or other costs, the difference between stabilisingnominal-GDP growth and a flexible inflation target are not that large; at least in the UK,tighter monetary policy would have done little to ward off the financial Crisis or limitits damage; nor am I convinced that the protracted weakness in Europe’s economies,since the Crisis, is solely the result of insufficiently easy monetary policy (or, moreparticularly, insufficiently high inflation).But a separate point is that, offering multiple alternatives to inflation targeting comesclose to offering none at all – a policy of pure discretion. Theory tells us unfettereddiscretion is usually suboptimal, however beguiling it may be in real time. We alsotried it, at length, in the UK: between Bretton Woods and inflation targeting, monetarypolicy had no real anchor (or none that endured for any time). One can’t say it workedout that well.ReferencesBean, C (2003), “Asset Prices, Financial Imbalances and Monetary Policy: Are InflationTargets Enough?”, speech given in Basel, Switzerland.Bean, C, Paustian, M, Penalver A and T Tim (2010), “Monetary policy after the fall”,speech given at Jackson Hole, Wyoming.57