Economics
Inflation Targeting
Inflation targeting is a monetary policy framework where a central bank sets an explicit target for the inflation rate and uses its policy tools to achieve that target. The goal is to maintain price stability and anchor inflation expectations. Central banks communicate their targets and policy actions to provide transparency and guidance to the public and financial markets.
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12 Key excerpts on "Inflation Targeting"
eBook - PDFInflation Targeting
Lessons from the International Experience
- Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, Adam S. Posen(Authors)
- 2018(Publication Date)
- Princeton University Press(Publisher)
Japan has recently announced its intention to adopt inflation targets. Moreover, most o f the elements o f Inflation Targeting can be f o u n d i n the long-standing and well-regarded monetary policy o f Germany and Switzerland. 1 I n the U n i t e d States, inflation tar- geting has attracted some influential advocates, both w i t h i n and outside the Federal Reserve System. For example, a b i l l introduced by Congress- m a n B i l l Saxton ("The Price Stability Act o f 1997") calls explicitly for the use o f inflation targets by the Fed. 2 Finally, the Maastricht Treaty, the basis for the proposed European monetary u n i o n , mandates price sta- bility as the primary objective o f the new European Central Bank. The European Monetary Institute has stated that "the list o f potential candi- date strategies [for the future ECB] has been narrowed down to two, namely monetary targeting and direct Inflation Targeting." 3 What Is Inflation Targeting? Inflation Targeting is a framework for monetary policy characterized by the public announcement o f official quantitative targets (or target ranges) for the inflation rate over one or more time horizons, and by explicit ac- knowledgment that low, stable inflation is monetary policy's primary long- r u n goal. A m o n g other important features o f Inflation Targeting are vigor- ous efforts to communicate with the public about the plans and objectives o f the monetary authorities, and, i n many cases, mechanisms that strengthen the central bank's accountability for attaining those objectives. A Framework, Not a Rule A principle theme o f this book is that, i n practice, Inflation Targeting serves as a framework for monetary policy rather than as a rule for m o n - etary policy. This distinction requires a bit o f explanation.
eBook - PDF- Rhona C. Free(Author)
- 2010(Publication Date)
- SAGE Publications, Inc(Publisher)
3 7 MONETARY POLICY AND Inflation Targeting PAVEL S. KAPINOS Carleton College DAVID WICZER University of Minnesota I nflation targeting (IT) is a framework for the conduct of monetary policy, under which the monetary authority announces a medium- or long-run inflation target and then uses all available information to set its policy instrument, the short-term nominal interest rate, so that this target is met. Short-lived deviations from the inflationary target may be acceptable, especially when there may be a short-run trade-off between meeting the target and another welfare consideration, for example, the output gap—the difference between actual and potential output. Hence, although the central bank commits to meeting a certain inflationary target, in practice, IT takes a less rigid form, with the central bank exercising some discretion over the path of actual inflation toward its tar-get. Recently, dozens of central banks around the world have introduced IT as their operational paradigm. Numerous studies indicate that this policy has been suc-cessful in achieving macroeconomic stability at no long-run cost in terms of lower real activity. Many central banks that have not explicitly subscribed to IT have been shown to follow it implicitly. IT provides a way for the central bank to communicate its intentions to the public in a clear, unequivocal manner, making the conduct of monetary policy more transparent and predictable. Transparency allows the public to hold the central bank accountable for its policy actions. In fact, in some countries, inflation-targeting central banks are subject to intense public scrutiny from the legislative bodies. Predictability of monetary policy allows the cen-tral bank to manage public inflationary expectations and better anchor them around the inflationary target; this allows the central bank to achieve macroeconomic stabil-ity more effectively.
eBook - ePub- Jack Rabin(Author)
- 2020(Publication Date)
- Routledge(Publisher)
Conducting Monetary Policy with Inflation TargetsGeorge A. KahnVice President and Economist, Federal Reserve Bank of Kansas City, Kansas City, MissouriKlara ParrishAssistant Economist, Federal Reserve Bank of Kansas City, Kansas City, MissouriReprinted from: Federal Reserve Bank of Kansas City Economic Review, v. 83, n. 3 (Third Quarter 1998) 5–32.Since the early 1990s, a number of central banks have adopted numerical inflation targets as a guide for monetary policy. The targets are intended to help central banks achieve and maintain price stability by specifying an explicit goal for monetary policy based on a given time path for a particular measure of inflation. In some cases the targets are expressed as a range for inflation over time, while in other cases they are expressed as a path for the inflation rate itself. The measure of inflation that is targeted varies but is typically a broad measure of prices, such as a consumer or retail price index.At a conceptual level, adopting inflation targets may necessitate fundamental changes in the way monetary policy responds to economic conditions. For example, Inflation Targeting requires a highly forward looking monetary policy. Given lags in the effects of monetary policy on inflation, central banks seeking to achieve a target for inflation need to forecast inflation and adjust policy in response to projected deviations of inflation from target. But central banks without an explicit inflation target may also be forward looking and equally focused on a long-run goal of price stability. Thus, at a practical level, adopting inflation targets may only formalize a strategy for policy that was already more or less in place. If so, targets might improve the transparency, accountability, and credibility of monetary policy but have little or no impact on the way policy instruments are adjusted to incoming information about the economy.
eBook - ePub- Benjamin M. Friedman, Michael Woodford(Authors)
- 2010(Publication Date)
- North Holland(Publisher)
Chapter 22Inflation Targeting
Lars E.O. Svensson Sveriges Riksbank and Stockholm UniversityAbstract
Inflation Targeting is a monetary-policy strategy characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast that has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and as of 2010 has been adopted by about 25 industrialized and emerging–market economies. This chapter discusses the history, macroeconomic effects, theory, practice, and future of Inflation Targeting.JEL classification : E52, E58, E42, E43, E47Keywords Flexible Inflation Targeting Forecast Targeting Optimal Monetary Policy TransparencyContents1. Introduction12381.1 An announced numerical inflation target12391.2 Forecast targeting12391.3 A high degree of transparency and accountability12401.4 Outline12412. History and Macroeconomic Effects12422.1 History12432.2 Macroeconomic effects12442.2.11246Inflation2.2.21247Inflation expectations2.2.31248Output2.2.41249Summary of effects of Inflation Targeting3. Theory12503.1 A linear–quadratic model of optimal monetary policy12523.2 The projection model and the feasible set of projections
No longer available |Learn more- Edwin M. Truman(Author)
- 2003(Publication Date)
From this perspective, monetary policy via the commitment to an infla-tion target risks becoming inappropriately and unnecessarily constrained by other economic considerations—for example, allowing inflation to de-part for a time from a level that normally would be associated with price stability. A similar perspective has been advanced by those who argue that the authorities may say they have an inflation anchor but other objectives (exchange rates, wage rates, or financial system stability) will come into play and, in practice, override the achievement of the inflation objective. Some of the arguments that have been advanced by Federal Reserve of-ficials (FOMC 1995, Greenspan 2001, and Meyer 2001) fall in this category: an inflation-targeting framework would in practice constrain discretion inappropriately—technology or economic changes could make a particu-lar statistical measure of inflation obsolete—or Inflation Targeting is too confining in terms of a need to make an ex ante commitment about the time horizon for returning to the target once it has been missed. Alice Rivlin (2002, 54) is a strong proponent of this view: I think an inflation target for the Federal Reserve is a bad idea, whose time has passed. Inflation targets may be useful for small open economies or developing countries in danger of hyperinflation, but not for big industrial economies such as our own. Keeping inflation under control should not be the only objective of the central bank. The ultimate objective is a higher standard of living for average peo-ple. Hence, the central bank ought to be trying to keep the economy on the high-est sustainable growth path. Inflation matters only if it is high enough to threaten the sustainability of growth. Some of the arguments that Inflation Targeting is too rigid rest on views about likely economic performance under such a framework.
- Abdul-Aziz Iddrisu, Imhotep Paul Alagidede(Authors)
- 2021(Publication Date)
- Taylor & Francis(Publisher)
2 Inflation Targeting framework in emerging and developing economies: Experiences and milestonesDOI: 10.4324/9781003195368-2Introduction
The inflationary episodes of the 1970s and parts of 1980s that struck a number of advanced economies prompted a transition to Inflation Targeting framework by these countries as monetary policy strategies such as the monetary targeting and pegged exchange rate regimes could not deliver the needed price stability (Svensson, 2011 ). Masson et al. (1997) reckon that the challenges of monetary targeting and pegged exchange rate regimes in the 1990s precipitated an exodus to Inflation Targeting framework by a number of advanced economies as a way to improve their inflation footprint. New Zealand was the first nation to unveil Inflation Targeting framework in the world in the year 1990. Other advanced countries followed, with Canada unveiling the framework in 1991, the United Kingdom in 1992, Australia in 1993 and Sweden in 1995. What the Inflation Targeting framework embodies and the foundations that define its successful implementation or otherwise are the subject of the succeeding sections of this chapter.The nature and pre-requisites of Inflation Targeting
The Inflation Targeting framework involves public communication of a quantitative inflation target by a central bank, to which it exercises commitment and strives to achieve in order to establish credibility and anchor inflation expectations. The framework also embodies transparency and engender accountability as monetary policy authorities regularly engage the public on decisions arrived at and the factors that informed the said decisions. Such transparency and public engagements help to shape the inflation expectations of the public in a way that engender convergence to the announced inflation target.The numerical or quantitative inflation target can be a range, a point target with or without a tolerance band (Svensson, 2011). For instance, South Africa has an inflation target range of 3%–6%; Ghana has a point target of 8% with a tolerance band of 2% (thus 8% ±
eBook - ePub- Philip Arestis, Malcolm Sawyer, Philip Arestis, Malcolm Sawyer(Authors)
- 2019(Publication Date)
- Palgrave Macmillan(Publisher)
Furthermore, when the inflation target is not met, the question arises how the central bank is formally held accountable; are explicit sanctions in place for this case? Therefore, the time horizon over which to meet the target is important. Following the theoretical background of Inflation Targeting, the effect of monetary policy on real activities is not only minor, but if existing it is only relevant in the short run. This means the alternative secondary goals are also only relevant in the short run and the implementation of inflation targets is to be seen within the scope of a medium or longer run policy. Some possible aspects of the inflation target scheme are used only rarely. The Law of New Zealand for example includes direct accountability of central bankers, and the tenure of the governor is linked to the achieving of the respective target (Bernanke and Mishkin 1997, p. 100; Debelle 1997, p. 18). No other economies seem to have implemented such a legal accountability. Central banks present their accountability sometimes via publications, like the inflation reports or monetary policy reports (e.g. Debelle et al. 1998, p. 8). 3 Dead Ones Live Longer: Empirical Evidences and Challenges After the Financial Crisis Numerous empirical studies on the effectiveness of Inflation Targeting for developed and emerging markets have been undertaken in recent decades. They vary in empirical method, countries included—with the main question whether to include or exclude so-called implicit Inflation Targeting economies—and time setting—before or after the global financial crisis—but have one striking feature in common: no clear evidence for the positive impact of Inflation Targeting in reducing rate of inflation. As for example Angeriz and Arestis (2006, p. 566) point out, inflation started to decrease in many of targeting economies even before Inflation Targeting as monetary policy was put in place
eBook - PDF- J. McCombie, C. Rodríguez González, J. McCombie, C. Rodríguez González, Kenneth A. Loparo, Carlos Rodríguez González(Authors)
- 2007(Publication Date)
- Palgrave Macmillan(Publisher)
28 3 Inflation Targeting: Assessing the Evidence Alvaro Angeriz and Philip Arestis Introduction Inflation Targeting (IT) as a policy framework, designed to tame inflation, has been with us since the early 1990s. Recent work makes the point that a significant number of countries adopted this strategy, and the number is growing. For example, Sterne (2002) suggests that 54 coun- tries pursued one form or another of IT by 1998, compared with only six in 1990. A more recent study (IMF, 2005) suggests that 21 countries (8 developed and 13 emerging) are now clear inflation targeters, pursu- ing a fully-fledged IT strategy (FFIT). Indeed, a number of other coun- tries are seriously considering the adoption of this strategy. Many studies have attempted to examine empirically the degree and extent of the impact of IT on inflation in various countries. We review this litera- ture in what follows and conclude that the available empirical evidence produces mixed results. In pursuing an IT strategy, countries commit themselves to price stabil- ity as the main objective of monetary policy, along with stipulating that medium- to long-term inflation is the nominal anchor where an inflation target is set. There are, of course, varying degrees of commitment to IT amongst countries. In more general terms, one may distinguish between three types of Inflation Targeting: the FFIT, as suggested above, the ‘Inflation Targeting Lite’ (ITL) type, and the ‘Eclectic Inflation Targeting’ (EIT) type. 1 The main distinguishing feature is the degree of clarity and institutional commitment to price stability. 2 Along with this commitment, an explicit inflation target (either point- or range-inflation target) is set; absence of other nominal anchors, policy instrument independence and absence of fiscal dominance, transparency, accountability and credibility of the com- mitment to IT by the central bank are further requirements (Mishkin
eBook - ePubInflation Targeting and Central Banks
Institutional Set-ups and Monetary Policy Effectiveness
- Joanna Niedźwiedzińska(Author)
- 2021(Publication Date)
- Routledge(Publisher)
In general, the more individualistic the committees, the more insights on individual opinions revealed. This may include presenting dissenting views, publishing detailed minutes, giving polemic speeches, and making voting records public. This information should help to better understand monetary policy decisions, but, at the same time, can create confusion about the dominant view. Ultimately, the emphasis on disagreements among committee members may limit the free exchange of opinions or render decision-makers more reluctant to reconsider their views.Although a high degree of transparency seems indisputable nowadays, it is a relatively new approach to monetary policy. Its popularity spread around the same time as IT, but greater emphasis on communication is not only attributable to inflation targeters. Having said that, from the very beginning inflation targeters occupied the top places in central banks’ transparency rankings, which is the best proof of the important role communication plays within the IT framework (Dincer and Eichengreen, 2013, p. 204).1.5.5 Empirical evidence on Inflation Targeting effectiveness
The constituting features of an Inflation Targeting strategy described above are designed to strengthen the commitment of IT monetary authorities to maintaining price stability, and by doing so, to build central banks’ credibility. In turn, as already noted, credibility is crucial for anchoring inflation expectations and, ultimately, for meeting the announced inflation targets at the lowest possible cost in terms of output. And, indeed, considering what can be called a traditional metric for assessing monetary policy effectiveness, i.e. a metric taking into account inflation and output developments (Brzoza-Brzezina, 2011, p. 7), an Inflation Targeting framework turns out to be the right way to deliver price stability while minimising economic growth volatility.Studies investigating the macroeconomic outcomes of pursuing an IT regime indicate that this framework has proved to be effective. This is especially true in the case of emerging market economies, while much weaker evidence of such beneficial effects can be established for advanced economy inflation targeters.
- Marc Pilkington(Author)
- 2013(Publication Date)
- Taylor & Francis(Publisher)
Inter alia, this list features Australia, Brazil, Canada, Mexico, New Zealand, Norway, Sweden and the United Kingdom. Policy strategies, tools and communication practices are not necessarily identical, as the latter might differ in the details. However, the common denominator of these central banks is that they all share a flexible interpretation of their mandate. In fact, an explicit inflation target over the medium term does not preclude the existence of an output and/or employment objective in the short run. So in the world of Inflation Targeting, there is assuredly a unity of purpose and a diversity of practices. However, there are a few prominent central banks, such as the European Central Bank (ECB) and the Swiss National Bank, that do not label themselves as ITers. Yet, these central banks are not alien to inflation-targeting practices, as they include key features of that framework for monetary policy. The latter include a ‘numerical definition of price stability, a central role for communications about the economic outlook, and a willingness to accommodate short-run economic stabilization objectives so long as these objectives do not jeopardize the primary goal of price stability’ (Bernanke, 2011b). Bean (2007) echoes our discussion on the (non)Shakespearean view of inflation-targeting, by explaining that the Fed and the ECB are not ITers although they behave as such. Bean (ibid.) therefore emphasizes the commonalities between self-proclaimed ITers and non-ITers. The differences between them amount to the rhetoric of communication. Pilkington (2012b) has raised the issue of the discursive nature of economics, in an ode to pluralism acknowledging the components of heterodoxy. In this respect, the words used by economists (or central bankers) are far from neutral. English for specific purposes and applied linguistics are therefore most relevant disciplinary fields, in order to reinterpret the Shakespearean debate on Inflation Targeting.Inflation Targeting and beyond: (re)shaping the NMCThe present book is entitled The Global Financial Crisis and the New Monetary Consensus
eBook - ePub- Benjamin M. Friedman, Michael Woodford(Authors)
- 2010(Publication Date)
- North Holland(Publisher)
F. Zampolli. Optimal monetary policy in a regime-switching economy: The response to abrupt shifts in exchange rate dynamics. Bank of England, 2006. Working Paper* I am grateful for comments by Petra Gerlach-Kristen, Amund Holmsen, Magnus Jonsson, Stefan Laséen, Edward Nelson, Athanasios Orphanides, Ulf Söderström, Anders Vredin, Michael Woodford, and participants in the ECB conference Key Developments in Monetary Economics and in all seminars at the Riksbank L. and Norges Bank. I thank Carl Andreas Claussen for excellent research assistance. The views presented here are my own and not necessarily those of other members of the Riksbank's Lo and Norges Bank executive board or staff.1 The term “inflation nutter” for a central bank that is only concerned about stabilizing inflation was introduced in a paper by Mervyn King at a conference in Gerzensee, Switzerland, in 1995 and later published as King (1997) . The terms “strict” and “flexible” Inflation Targeting were to my knowledge first introduced in a paper of mine presented at a conference at the bank of Portugal in 1996, later published as Svensson (1999b) .2 The policy rate (instrument rate) is the short nominal interest rate that the central bank sets to implement monetary policy.3 The idea that Inflation Targeting implies that the inflation forecast can be seen as an intermediate target was introduced in King (1994) . The term “inflation-forecast targeting” was introduced in Svensson (1997) , and the term “forecast targeting” in Svensson (2005) . See Woodford (2007)
eBook - PDF- Ben S. Bernanke, Michael Woodford, Ben S. Bernanke, Michael Woodford(Authors)
- 2007(Publication Date)
- University of Chicago Press(Publisher)
Our advocacy of a more complex form of targeting rule is not meant to deny the desir-ability of having a medium-term inflation target that remains the same even if the actual inflation rate may depart from it temporarily. In the ex-amples that we have considered, optimal policy almost always involves a well-defined long-run inflation target, to which the inflation rate should be expected to return after each disturbance, and it is surely desirable for a central bank to be explicit about this aspect of its policy commitment, in order to anchor the public’s medium-term inflation expectations. Rather, we wish to suggest that it is insu ffi cient to specify no more of a policy commitment than this. The mere fact that a central bank wishes to see inflation return to a rate of 2.5 percent at a horizon two years in the fu-ture is not su ffi cient to say which of the various possible transition paths that reach that endpoint should be preferred. There will always be a range of possible scenarios consistent with the terminal condition: for example, looser policy this year to be compensated for by tighter policy next year, or alternatively the reverse. In practice, the Bank of England, like many other forecast-targeting banks, deals with this problem by demanding that a constant–interest rate forecast satisfy the terminal condition. That is, the current level of over-Optimal Inflation-Targeting Rules 157 night interest rates is held to be justified if a projection under the assump-tion that that level of interest rates will be maintained implies that RPIX inflation should equal 2.5 percent eight quarters in the future. However, this implies no commitment to actually maintain interest rates at the cur-rent level over that period, or even that interest rates are currently expected to remain at that level on average.
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