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

Inflation targeting: Fix it, don’t scrap itfurther immediate cuts in the policy rate, the possibility of providing stronger incentivesfor current spending by creating expectations of looser monetary policy in the futurethan would otherwise have been expected can in principle be an important additionalpolicy tool. But an important limit to the effectiveness of such ‘forward guidance’ is thefact that people need to be given a reason to believe that policy will in fact be conducteddifferently in the future, and not simply that the central bank currently wishes them tobelieve this. 7 I believe that this can most effectively be done by announcing a targetcriterion that will be used to determine future policy decisions, and then demonstratingthat policy deliberations are indeed organised around verification of the announcedcriterion.The recent calls for new approaches to the conduct of monetary policy, that somehave interpreted as repudiations of inflation targeting, arise in this context. The Fed’sintroduction of a threshold for unemployment, which should be reached before it willbe appropriate to begin raising the federal funds rate from its current near-zero level(assuming that inflationary expectations remain contained), is an attempt to provideassurance that interest rates will remain low for longer than might already have beenexpected on the basis of past conduct. My own proposal (Woodford 2012b) that theFed commit to maintain its highly accommodative policy until nominal GDP catchesup to a target path had the same intention, and it is in this context that Bank of EnglandGovernor-designate Mark Carney has spoken of the possible benefits of a nominal-GDP target as well (Carney 2012). Indeed, Carney’s suggestion occurs in the courseof a discussion of approaches to the provision of ‘guidance’ about future policy, as aform of ‘unconventional policy’ that can deployed when the interest-rate lower boundhas been reached.It is true that Carney refers to this option as one that is not “available to a central bankoperating under flexible inflation targeting”, and says that if its use were required, “the7 Woodford (2012b) discusses a case in which an announcement by the Riksbank that its policy rate was projected toremain at its current low level for several quarters seems to have had a contractionary effect, rather than the desiredexpansionary one, owing to insufficient credibility of the asserted path of future policy.81