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

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Is inflation targeting dead? Central Banking After the Crisisnominal-GDP target imparts a pre-commitment announcement aspect to the policy.Ideally it forces the central bank to take into account past inflation undershoots and totry to make up for them in future.• I am sympathetic to this sentiment as a good guide to policy; I am just completelysceptical that nominal-GDP targeting achieves this in any way in practice.I do not think changing the policy’s label is going to somehow makes it a more crediblelong-term commitment.Taking history into account and providing a catch-up factor, would be illusory inpractice because of two things 1 .First, inflation targets are reasonably well understood and make a good effort of beingtransparent; a nominal-GDP target inherently is going to be incredibly fragile, nonrobustto changes in definition and time period.For example the size of the catch-up factor:• Depends at what exact time you decide is the point to start catching up;• Depends how many revisions there are to the data in the intervening period (andGDP data are repeatedly revised).Second, nominal GDP is not something you can communicate intuitively.As such it is going to be arbitrary in terms of trying to get the general public to understandwhat a nominal-GDP number means. Unlike with an inflation number, people cannotobserve nominal GDP when they go to the store. Of course, they don’t observe core CPIin the store either, but the prices give them something tangible, something to which theycan anchor their expectations.Then there is the issue of accuracy as in, for example, the ‘rivers of blood’ in the Bankof England’s inflation and real-GDP fan charts. Nominal-GDP targeting would lead to1 Hellebrandt (2013) gives an opposing positive view of nominal-GDP targeting.62
Cheap talk is no alternative to inflation targetingerror bands for inflation that are wider and more difficult to interpret. Alternatively, ifyou think you are going to hit the nominal-GDP target, the error band of how much ofit is going to be new growth versus inflation would be extremely wide. The net effectwould be to increase the volatility of inflation by a large measure. This does not seemlike an improvement when you have been targeting an inflation rate with reasonableaccuracy.The point is simple to illustrate with an example. Say we have very slow growth, aswe do now – perhaps because of the Eurozone Crisis, financial factors, and/or fiscalausterity. With a nominal-GDP target of, say, 5%, you end up with an inflation rate of3% or 4% as an intentional policy. But In this case, the markets will rightly say, “Ohmy god, this is a much less credible inflation regime. The government and the centralbank are consciously choosing a higher inflation rate than they have been for years.”The likely outcome, in my opinion, is that you will get higher inflation and lose theanchoring effect of inflation targeting that my Bank of England colleagues and Icounted on. When inflation shot up to 5%, people expected it would come back downto 2% – as it did, broadly speaking.The lack of stimulus impact is not the fault of inflationtargetingInflation targeting was not the reason why quantitative easing failed to achieve the strongrecovery we hoped for and though was possible. I do believe quantitative easing wasreasonably effective and, for various political reasons, some other forms of quantitativeeasing that I think could have added to effectiveness were not pursued (Posen 2012).But the reason they were not pursued had nothing to do with the inflation target. Theyhad to do with governance, organisational decisions and ideological beliefs on the partof central bank committee members. They were never argued against such measures onthe basis of: “We can’t do that because that will be contrary to target.”63
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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
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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
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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 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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