Inflation Targeting
Overview
- Glenn D. Rudebusch and Carl Walsh, "U.S. Inflation Targeting: Pro and Con," Federal Reserve Bank of San Francisco Economic Letter #98-18, May 29, 1998.
Rudebusch and Walsh (1998) presents a useful starting point for different perspectives on the appropriateness of inflation targeting for the U.S. But you'll want to consider additional arguments....
Arguments in Favor
- Frederic S. Mishkin, "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, v. 7, n. 1, March 2004, pp. 117–127.
- Ben S. Bernanke, "A Perspective on Inflation Targeting: Why It Seems to Work,," Business Economics, July 2003, pp. 7–15.
In recent years, a significant number of academic economists have come out in favor of inflation targeting. Bernanke (a Federal Reserve governor) and Mishkin (Columbia business school professor) are among two of the more prominent (and stronger) proponents. Additionally, a number of central banks in both developed and developing countries have formally adopted inflation targeting, including the central banks of Australia, Canada, England, New Zealand, and Sweden.
Arguments Against
- Benjamin M. Friedman, "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, v. 7, n. 1, March 2004, pp. 129–136.
- Laurence H. Meyer, "Inflation Targets and Inflation Targeting," Federal Reserve Bank of St. Louis Economic Review, v. 83, n. 6. November 2001, pp. 1–14.
Despite the generally broad support for inflation targeting, several economists — as well as a number of Federal Reserve policymakers — have expressed reservations about the appropriateness of inflation targeting for the U.S., or more generally.
Empirical Evidence
- Laurence Ball and Niamh Sheridan, "Does Inflation Targeting Matter?" NBER Working Paper #9577, March 2003.
- Manfred J. M. Neumann and Jürgen von Hagen, "Does Inflation Targeting Matter?" Federal Reserve Bank of St. Louis Economic Review, v. 84, n. 4. July, 2002, pp. 127–148.
The evidence in favor of the macroeconomic effects of inflation targeting is arguably mixed: inflation has tended to fall over the 1990s in all countries, whether their central bank practices inflation targeting or not. Thus, it is difficult to determine the counter-factual: what would have occurred had certain countries not adopted inflation targeting? Or if others had? In a pair of identically titled articles, Ball and Sheridan (2003) and Neumann and von Hagen (2002) examine the cross-country evidence. The first pair of authors conclude that "there is no evidence that inflation targeting improves [macroeconomic] performance." Mishkin (2002) provides commentary on the Neumann and von Hagen (2002) paper, and is (as above) far more optimistic about the prospects for inflation targeting.
- Frederic S. Mishkin "Commentary on 'Does inflation targeting matter?'," Federal Reserve Bank of St. Louis Economic Review, v. 84, n. 4. July, 2002, pp. 149–154.
Additional Discussion and Debate
- Conference Proceedings: "Inflation Targeting: Prospects and Problems," Federal Reserve Bank of St. Louis Economic Review, v. 86, n. 4, July/August 2004.
This Fall 2003 symposium on Inflation Targeting at the St. Louis Fed offers numerous perspectives on the pros and cons of inflation targeting. Importantly, each of the articles is followed by critical comments. Individual articles from the conference proceedings are available as well. (Scroll down to find the list of articles.)
- "The Inflation Targeting Debate," Ben S. Bernanke and Michael Woodford, eds., Forthcoming from The University of Chicago Press, Fall 2004.
A wide-ranging, if at times technical, discussion of issues related to inflation targeting, both in theory and as practiced around the world. Some of the above cited papers are collected in this volume. Importantly, each paper is assessed critically by another author and discussed by a broader audience of economists and academics. From a January 2003 NBER conference.