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

Is inflation targeting dead? Central Banking After the CrisisFirst, the Bank of Canada made such announcements and it didn’t work well.At various times, despite the announcement, the market would move in ways suggestingthat market participants thought the announcement was being rescinded. This wasencouraged by economic data being released in commentary by Bank of Canadaofficials. In fact, at one point the market moved exactly opposite to what the Bank ofCanada was hoping for.Second, the Swedish Riksbank has been at the forefront of pre-committing to aninterest-rate path and being transparent about its choices and thinking, but there isample evidence that this has not been consistently effective.Indeed the Riksbank’s deputy governor is Lars Svensson – the mind behind many of thesepre-commitment arguments. Despite this, the market does not find pre-commitment tobe fully credible. Market participants discount it since interest rates fluctuate quite a bit,despite the very explicit forward commitments (Posen 2012).Third, the Federal Reserve recently embraced a version of pre-commitments whenthe FOMC announced in November 2012 that they were switching to a ‘thresholdsmodel’. Namely, they would not raise rates until unemployment fell unless the inflationthreshold was violated.I think that was the right stance of policy. Then we saw the next month, based on somecomments in the minutes from the FOMC meeting, the market sold off.The bottom line lesson for me is that talk is cheap. People have always believed thatabout central bankers. It is more important what you do; your reputation for actionearns reaction. I do not think that talking, without making purchases or commitments,does much. That’s not to say that what you say is irrelevant. You can do some harm ifwhat you say and do contradict each other. This was one of the problems with the Bankof Japan in the 1990s and early 2000s. They would say one thing and do another.60