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

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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
The evolution of modern central banking: What happens next?an increasing number of other central bankers feel they have little choice but to followa similar policy approach.The immediate implications include (but are not limited) to the following three issues: 22• A shift in the operational focus of central banks that places greater (relative andabsolute) emphasis on growth and employment objectives as opposed to traditionalinflation targets, or what I called the ‘Reverse Volcker Moment’ (El-Erian 2012c);• Distorted functioning of financial markets as artificial pricing for certain assets iscombined with changes in market liquidity and institutional capacity;• Public moral hazard, with complacency reigning (and, in the case of Europe, increasing)among politicians and other policymakers, including those with tools thatwould address more directly the impediments to a durable economic recovery andthe related safe deleveraging of over-indebted segments.I suspect that these three issues feature prominently when central bankers – includingBernanke, Carney, Draghi, King and Shirakawa – refer to the collateral risk andunintended consequences of unconventional monetary policy. And in most instances,an informed judgement may be made whether these are compensated by the expectedupside. Based on central bankers’ revealed preference, the judgement remains that,again to use a Bernanke formulation, the ‘benefits’ exceed the ‘costs and risks’.Unfortunately, this may not be the case for longer-term issues. Already, there arereasons to postulate that these may prove much more complex in nature – particularlyif politicians and other policymakers continue to remain on the sidelines and, thus, failto exploit the window afforded to them by central bankers.The longer Western central banks remain in this mode, the greater the policy dilemmasfacing other countries. Indeed, as Felipe Larraín, Chile’s minister of finance, warned in2 For a more complete list, please refer to El-Erian 2012b.69
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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
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Introduction• Perpetrator: Inflat
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Introductionboth transparent commun
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Introduction• Financial crises of
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Page 19 and 20: Introductionuntil unemployment fell
Page 21 and 22: Introductionbalance-sheet impairmen
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Page 29 and 30: IntroductionConcluding remarksInfla
Page 31 and 32: Who killed the inflation target?Lor
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Is inflation targeting dead? Centra
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Will central banking change?Charles
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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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