Is Inflation Targeting Still Relevant?

In his paper titled “Inflation Targeting: A Monetary Police Regime Whose Time Has Come and Gone,” David Beckworth calls on the Fed to advance beyond inflation targeting.

ABSTRACT

Inflation targeting emerged in the early 1990s and soon became the dominant monetary-policy regime. It provided a much-needed nominal anchor that had been missing since the collapse of the Bretton Woods system. Its arrival coincided with a rise in macroeconomic stability for numerous countries, and this led many observers to conclude that it is the best way to do monetary policy. Some studies show, however, that inflation targeting got lucky. It is a monetary regime that has a hard time dealing with large supply shocks, and its arrival occurred during a period when they were small. Since this time, supply shocks have become larger, and inflation targeting has struggled to cope with them. Moreover, the recent crisis suggests it has also a tough time dealing with large demand shocks, and it may even contribute to financial instability. Inflation targeting, therefore, is not a robust monetary-policy regime, and it needs to be replaced.

ABOUT DAVID BECKWORTH

David Beckworth is a former international economist at the US Department of
the Treasury and the author of Boom and Bust Banking: The Causes and Cures of the Great Recession. His research focuses on monetary policy. Currently he is an assistant professor at Western Kentucky University.

Read the paper at http://mercatus.org/sites/default/files/Beckworth-Inflation-Targeting.pdf.

Comments are closed.