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

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