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

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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the announcement, the market would move in ways suggestingthat market participants thought the announcement was being rescinded.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
Cheap talk is no alternative to inflation targetingAn example on the other side is the Bank of England. The UK Monetary PolicyCommittee does not pre-commit. It is the explicit ethos of the committee that its eachmonth is new. Despite this lack of pre-commitment, all the econometric evidence is thatthe impact of quantitative easing was very closely comparable in the UK to that of theUS and larger than in some other central-bank situations without the pre-commitment(Joyce, et al 2012).Nevertheless, Bank of Canada governor Mark Carney made claims in a Decemberspeech where he said: “The Bank’s conditional commitment succeeded in changingmarket expectations of the future path of interest rates, providing the desired stimulusand thereby underpinning a rebound in growth and inflation in Canada.” (Carney 2012).I do expect that the Bank’s statement initially had impact in the desired direction, justas any statement from the officials of any central bank would have a market impact. Itmay be because at that time Governor Carney and the Bank of Canada said, “We aredoing this for multiple months,” or whatever, it was seen as a stronger statement of theirpreference to go for growth than something else.But believing that jawboning had some effect is not the same as believing that it is anindependent tool of monetary policy with a lasting and credible effect. Rather, it isjust another form of rhetoric. It may be a slightly more intense form of rhetoric and,therefore, may have a slightly larger and more lasting impact, but to my mind it is stillnot an actual policy tool or commitment. It does not have the large effects that MrCarney and others seem to think is the case.Another alternative to inflation targeting commonly prosed is nominal-GDP targeting.Critique of nominal-GDP targetingMy critique of nominal-GDP targeting in general terms is that it is an unnecessarycomplication – especially if you have a flexible inflation target (Bank of England) ora dual mandate (Federal Reserve). I understand the theoretical advantages. Having a61
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Is Inflation Targeting Dead?Central
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ContentsForewordviiIntroduction 10L
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ForewordSince the onset of the Glob
Page 9 and 10: ForewordThe limits of monetary poli
Page 11 and 12: Introduction• Perpetrator: Inflat
Page 13 and 14: Introductionboth transparent commun
Page 15 and 16: Introduction• Financial crises of
Page 17 and 18: IntroductionThis posed a novel prob
Page 19 and 20: Introductionuntil unemployment fell
Page 21 and 22: Introductionbalance-sheet impairmen
Page 23 and 24: Introduction• Consideration of su
Page 25 and 26: Introductionenhance actual growth,
Page 27 and 28: Introductionrather than interpretin
Page 29 and 30: IntroductionConcluding remarksInfla
Page 31 and 32: Who killed the inflation target?Lor
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Page 35 and 36: Who killed the inflation target?red
Page 37 and 38: Is inflation targeting passé?Stefa
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Page 44 and 45: Monetary targetry: Might Carneymake
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Page 66 and 67: The evolution of modern centralbank
Page 74 and 75: Inflation targeting: Fix it, don’
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Page 90 and 91: Nominal-GDP targets, without losing
Page 104 and 105: A broader mandate: Why inflationtar
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Will central banking change?Charles
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Central banking after the Crisis:Ch
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Challenges to inflation targeting a
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Is inflation targeting dead? Central Banking After the Crisis - Vox

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