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

Is inflation targeting dead? Central Banking After the Crisisat the same time as an increasing number of emerging economies concluded that theyhad no choice but to also succumb to this policy approach, and did so after some triedjust to absorb the consequences while others experimented with heterodox measures(El-Erian 2013a). It is just a matter of time until the ECB feels compelled to join (El-Erian 2013b).The policy paradigm relies on a combination of one or more of three basic buildingblocks:• Very low nominal policy-interest rates (and negative real rates);• Unprecedented forward-policy guidance;• Aggressive use of balance sheets to change market-pricing relations, correlationsand, therefore, the behaviour of commercially oriented investors.The intermediate objective is to combine financial repression (Reinhart and Sbrancia2011) with the triggering of the ‘wealth effect’ and ‘animal spirits’. The former taxescreditors to subsidise debtors. The latter two engage healthy balance sheets, directlyand by sustaining artificially low interest rates on ‘safe financial assets’ to, using Fedchairman Ben Bernanke’s term, ‘push’ investors to take more risk.Immediate and longer-term implicationsDespite unprecedented central-bank policy activism, macroeconomic outcomes haverepeatedly fallen short of both general expectations and those of central bankersthemselves. And with other policymakers being inadequately supportive, central bankshave felt that they have no choice but to be dragged further into an unfamiliar policyexperimentationmode (El-Erian 2012a).As an illustration of this repeated phenomenon, witness the seemingly neverendingseries of new unconventional measures by the Fed. And with the US’s special role inthe world as the provider of many global public goods, including the reserve currency,68