From monetary targeting to inflation targeting: lessons from the industrialized countries

The author examines changes in monetary
\n policy in industrial countries by evaluating, and providing
\n case studies of monetary targeting, and inflation targeting.
\n Inflation targeting has successfully controlled inflation,
\n with some qualifications. It weakens the effects of
\n inflationary shocks, as examples from Canada, Sweden, and
\n the United Kingdom show. It can promote growth, and does not
\n lead to increased fluctuations in output. But inflation
\n targets do not necessarily reduce the cost of reducing
\n inflation. The key to success of inflation targeting, is its
\n stress on transparency, and communication with the public.
\n Inflation targeting increases accountability, which helps
\n ameliorate the time-inconsistency trap (in which the central
\n bank tries to expand output, and employment in the short
\n run, by pursuing overly expansionary monetary policy).
\n Time-inconsistency is more likely to come from political
\n pressures on the central bank, to engage in overly
\n expansionary monetary policy. A key advantage of inflation
\n targeting, is that it helps focus the political debate on
\n what a central bank can do in the long run (control
\n inflation) rather than what it cannot do (raise economic
\n growth, and the number of jobs permanently through
\n expansionary monetary policy). By increasing transparency,
\n and accountability, inflation targeting helps promote
\n central bank independence. Accountability to the general
\n public seems to work as well as direct accountability to the
\n government. Inflation targeting is consistent with
\n democratic principles. In discussing operational design, the
\n author explains, among other things, that: 1) Inflation
\n targeting is far from rigid rule. 2) Inflation targets have
\n always been above zero with no loss of credibility. 3)
\n Inflation targeting does not ignore traditional
\n stabilization goals. 4) Avoiding undershoots of the
\n inflation target, is as important, as avoiding overshoots.
\n 5) When inflation is initially high, inflation targeting may
\n have to be phased-in after disinflation. 6)The edges of the
\n target range, can take on a life of their own. 7) Targeting
\n asset prices, such as the exchange rate, worsens performance.

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