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 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.

Bibliographic Details

Main Author:	Mishkin, Frederic S.
Language:	English en_US
Published:	World Bank, Washington, DC 2001-10
Subjects:	AGGREGATE DEMAND, ANNUAL INFLATION, ANNUAL INFLATION RATE, ASSET PRICES, BANK DEPOSITS, CASH RATE, CENTRAL BANK, CENTRAL BANKS, COMMERCIAL BANKS, CONTROL OF INFLATION, DEFLATION, DEVALUATION, DISINFLATION, ECONOMIC ACTIVITY, ECONOMIC GROWTH, ECONOMIC PERFORMANCE, ECONOMIC RESEARCH, EXCHANGE RATE, EXCHANGE RATE DEPRECIATION, EXCHANGE RATES, EXPANSIONARY MONETARY POLICY, EXPORTS, FINANCIAL INNOVATION, FINANCIAL MARKET STABILITY, FINANCIAL SECTOR, GDP, GROWTH RATE, GROWTH RATES, HIGH, HIGH INFLATION, HIGH PRIORITY, INDUSTRIAL COUNTRIES, INFLATION, INFLATION CONCERNS, INFLATION PROCESS, INFLATION RATE, INFLATION RATES, INFLATION RISING, INFLATION TARGET, INFLATION TARGETING, INFLATION TARGETING REGIME, INFLATION TARGETS, INSTITUTIONAL CHANGES, INSTITUTIONAL STRUCTURE, INTEREST RATE, INTEREST RATES, INTERNATIONAL EXPERIENCE, LIQUIDITY, LOW INFLATION, M2, M3, MONETARY AGGREGATE, MONETARY AGGREGATES, MONETARY AUTHORITIES, MONETARY BASE, MONETARY POLICY, MONETARY TARGETING, MONEY BASE, MONEY GROWTH, NOMINAL ANCHOR, NOMINAL INCOME, OPEN ECONOMIES, OUTPUT GROWTH, POLICY INSTRUMENTS, POLICY RESEARCH, POLICY TARGETS, POTENTIAL OUTPUT, PRICE INCREASES, PRICE LEVEL, PRICE STABILITY, PUBLIC SECTOR, QUANTITY THEORY, REAL OUTPUT, REDUCING INFLATION, RESERVE, RESURGENCE OF INFLATION, RISE IN INFLATION, TERMS OF TRADE, TERMS OF TRADE SHOCK, TIGHT MONETARY POLICY, TRANSPARENCY, TRUSTS, UNEMPLOYMENT,
Online Access:	http://documents.worldbank.org/curated/en/2001/10/1614818/monetary-targeting-inflation-targeting-lessons-industrialized-countries https://hdl.handle.net/10986/19531
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