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Vol. 83, No. 6
Posted 2001-11-01

Inflation Targets and Inflation Targeting

by Laurence H. Meyer

The Federal Reserve currently has a dual mandate: promote price stability and full employment. In a speech presented at the University of California at San Diego Economic Roundtable, Laurence Meyer explores two policy options that would change the current framework. Meyer discusses whether the United States should (i) move to an inflation-targeting regime (placing primary emphasis on price stability) or (ii) set an explicit numerical target for inflation within the context of the current dual mandate. For background, he describes an inflation-targeting regime, reviews various mandates around the world, and discusses common elements and differences among the regimes. He then explores each option. Because the first option may reduce the flexibility of monetary policy too stringently, it is determined to be undesirable. The second option would, in the author’s opinion, give added precision to an already mandated objective because it would improve transparency and accountability of the Fed, anchor inflation expectations and increase the Fed’s credibility, and institutionalize good monetary policy. The steps necessary to implement the preferred option are outlined.



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