From Monetary Targeting to Inflation Targeting : Lessons from the Industrialized Countries
The author examines changes in monetary policy in industrial countries by evaluating, and providing case studies of monetary targeting, and inflation targeting. Inflation targeting has successfully controlled inflation, with some qualifications. It...
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| Language: | English en_US |
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World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/10/1614818/monetary-targeting-inflation-targeting-lessons-industrialized-countries http://hdl.handle.net/10986/19531 |
| Summary: | The author examines changes in monetary
policy in industrial countries by evaluating, and providing
case studies of monetary targeting, and inflation targeting.
Inflation targeting has successfully controlled inflation,
with some qualifications. It weakens the effects of
inflationary shocks, as examples from Canada, Sweden, and
the United Kingdom show. It can promote growth, and does not
lead to increased fluctuations in output. But inflation
targets do not necessarily reduce the cost of reducing
inflation. The key to success of inflation targeting, is its
stress on transparency, and communication with the public.
Inflation targeting increases accountability, which helps
ameliorate the time-inconsistency trap (in which the central
bank tries to expand output, and employment in the short
run, by pursuing overly expansionary monetary policy).
Time-inconsistency is more likely to come from political
pressures on the central bank, to engage in overly
expansionary monetary policy. A key advantage of inflation
targeting, is that it helps focus the political debate on
what a central bank can do in the long run (control
inflation) rather than what it cannot do (raise economic
growth, and the number of jobs permanently through
expansionary monetary policy). By increasing transparency,
and accountability, inflation targeting helps promote
central bank independence. Accountability to the general
public seems to work as well as direct accountability to the
government. Inflation targeting is consistent with
democratic principles. In discussing operational design, the
author explains, among other things, that: 1) Inflation
targeting is far from rigid rule. 2) Inflation targets have
always been above zero with no loss of credibility. 3)
Inflation targeting does not ignore traditional
stabilization goals. 4) Avoiding undershoots of the
inflation target, is as important, as avoiding overshoots.
5) When inflation is initially high, inflation targeting may
have to be phased-in after disinflation. 6)The edges of the
target range, can take on a life of their own. 7) Targeting
asset prices, such as the exchange rate, worsens performance. |
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