Inflation Targeting: Prospects and Problems
The author surveys the theoretical literature on optimal monetary policy. He concludes that the recent literature on the welfare consequences of alternative monetary policies finds that there is less tension between inflation stabilization and properly defined real stabilization objectives than traditional (nonwelfare-theoretic) literature on monetary stabilization policy has often suggested.
The authors attempt to assess on empirical grounds whether inflation targeting has made a difference for economic performance. In the tradition of the existing literature on this topic, the authors ask whether the economic performance of a group of countries that have adopted inflation targeting differs substantially from a group of countries that have not.
The author notes that the view of inflation targeting as some sort of a monetary policy rule stems, in large part, from the fact that the adoption of it by many central banks and the explosion of research on monetary policy rules occurred at much the same time. He further notes that conditional rules allow the policymaker to respond in a reasonable (or even optimal) manner to economic conditions.
The authors systematically analyze whether inflation targeting constitutes “best practice” monetary policy. They note that the inflation targeting perspective is bolstered by the now nearly universally accepted fact that there is no long-run Phillips curve trade-off of the traditional variety.
The author first makes a distinction between what he terms inflation targeting and inflation targets. He notes that inflation-targeting countries generally operate with both an explicit numerical inflation target and a hierarchical mandate, under which central banks are restricted in pursuing other objectives unless price stability has been achieved.