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The Inflation-Targeting Debate - Isbn:9780226044736

  • Book Title: The Inflation-Targeting Debate
  • ISBN 13: 9780226044736
  • ISBN 10: 0226044734
  • Author: Ben S. Bernanke, Michael Woodford
  • Category: Business & Economics
  • Category (general): Business & Economics
  • Publisher: University of Chicago Press
  • Format & Number of pages: 468 pages, book
  • Synopsis: Sticky information vs. sticky prices: A proposal to replace the New Keynesian Phillips curve. ... N. Gregory Mankiw I like the starting point of this paper—the question of whether inflation targeting or price-level targeting is the better policy for a ...

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The inflation-targeting debate

The inflation-targeting debate

Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain.

In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

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Articles

Bernanke, B

Inflation Targeting:
Lessons from the International Experience
Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, & Adam S. Posen

How should governments and central banks use monetary policy to create a healthy economy? Traditionally, policymakers have used such strategies as controlling the growth of the money supply or pegging the exchange rate to a stable currency. In recent years a promising new approach has emerged: publicly announcing and pursuing specific targets for the rate of inflation. This book is the first in-depth study of inflation targeting. Combining penetrating theoretical analysis with detailed empirical studies of countries where inflation targeting has been adopted, the authors show that the strategy has clear advantages over traditional policies. They argue that the U.S. Federal Reserve and the European Central Bank should adopt this strategy, and they make specific proposals for doing so.

The book begins by explaining the unique features and advantages of inflation targeting. The authors argue that the simplicity and openness of inflation targeting make it far easier for the public to understand the intent and effects of monetary policy. This strategy also increases policymakers' accountability for inflation performance and can accommodate flexible, even "discretionary," monetary policy actions without sacrificing central banks' credibility. The authors examine how well variants of this approach have worked in nine countries: Germany and Switzerland (which employ a money-focused form of inflation targeting), New Zealand, Canada, the United Kingdom, Sweden, Israel, Spain, and Australia. They show that these countries have typically seen lower inflation, lower inflation expectations, and lower nominal interest rates, and have found that one-time shocks to the price level have less of a "pass-through" effect on inflation. These effects, in turn, are improving the climate for economic growth. The authors warn, however, that the success of inflation targeting depends on operational details, such as how the targets are defined and when they are announced. They also show that inflation targeting is not a panacea that can make inflation perfectly predictable or reduce it without economic costs.

Clear, balanced, and authoritative, Inflation Targeting is a groundbreaking study that will have a major impact on the debate over the right monetary strategy for the coming decades. As a unique comparative study of what central banks actually do in different countries around the world, this book will also be invaluable to anyone interested in how economic policy is made.

"Bernanke et al. provide a coherent and well-structured analysis of IT that will be essential reading for central bankers and academics interested in simply understanding IT, or contemplating an IT regime themselves. The volume is rich in detail about the individual experiences of the various inflation targeting countries."--Journal of Economics

"A groundbreaking study that will be likely to have a major impact on the debate over the right monetary strategy for the coming years. As many countries currently think of adopting inflation targeting in one form or another, the arrival of this book could not be more timely."--Weltwirtschaftliches Archiv, Review of World Economics

"This readable and well-structured examination of a relatively new approach to guiding monetary policy is a useful addition to contemporary policy analysis."--Choice

"The most accessible study of this important new monetary regime--accessible to a wide range of readers well beyond the ranks of professional economists. [Inflation Targeting ] should, and is intended to, appeal to historians, political scientists, international-relations students, politicians, central bankers, journalists, as well as to economists and to undergraduates at any level of sophistication."--C.A.E. Goodhart, London School of Economics and external member of the United Kingdom's Monetary Policy Committee

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Other Princeton books authored or coauthored by Ben S. Bernanke:

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Download free eBook The Inflation Targeting Debate PDF by Ben Bernanke

Download EBOOK The Inflation Targeting Debate PDF for free Description of the book "The Inflation Targeting Debate":

Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain. In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation targeting--its PDF potential, its successes, and its limitations--from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.



Ben Bernanke

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The Inflation-Targeting Debate, Bernanke, Woodford

The Inflation-Targeting Debate

Acknowledgments
 
Introduction
Ben Bernanke and Michael Woodford
1. What Has Inflation Targeting Achieved?
Mervyn King
 
I. Optimal Targets
2. Implementing Optimal Policy through Inflation-Forecast Targeting
Lars E. O. Svensson and Michael Woodford
Comment: Bennett T. McCallum
Discussion Summary
3. Optimal Inflation-Targeting Rules
Marc P. Giannoni and Michael Woodford
Comment: Edward Nelson
Discussion Summary
4. Inflation Targeting, Price-Path Targeting, and Output Variability
Stephen G. Cecchetti and Junhan Kim
Comment: N. Gregory Mankiw
Discussion Summary
5. Imperfect Knowledge, Inflation Expectations, and Monetary Policy
Athanasios Orphanides and John C. Williams
Comment: George W. Evans
Discussion Summary

II. Critical Perspectives
6. Does Inflation Targeting Matter?
Laurence Ball and Niamh Sheridan
Comment: Mark Gertler
Discussion Summary
7. Limits to Inflation Targeting
Christopher A. Sims
Comment: Stephanie Schmitt-Grohé
Discussion Summary
8. Inflation Targeting in the United States?
Marvin Goodfriend
Comment: Donald L. Kohn
Discussion Summary 
 
III. Inflation Targeting for Emerging Markets  

9. Inflation Targeting in Transition Economies: Experience and Prospects
Jiri Jonas and Frederic S. Mishkin
Comment: Olivier Blanchard
Discussion Summary
10. Inflation Targeting and Sudden Stops
Ricardo J. Caballero and Arvind Krishnamurthy
Comment: Ben S. Bernanke
Discussion Summary
 
Contributors
Author Index
Subject Index

Kirdan Lees | Economic Record

"A useful reference for macroeconomists interested in the US monetary policy debate and for policy-makers thinking hard about legitimate objectives for modern central bansk."

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Download PDF: The Inflation-Targeting Debate by Ben S

Download EBOOK The Inflation-Targeting Debate PDF for free Description of the book "The Inflation-Targeting Debate":

Over the past fifteen years, a significant number of industrialized and middle-income countries have adopted inflation targeting as a framework for monetary policymaking. As the name suggests, in such inflation-targeting regimes, the central bank is responsible for achieving a publicly announced target for the inflation rate. While the objective of controlling inflation enjoys wide support among both academic experts and policymakers, and while the countries that have followed this model have generally experienced good macroeconomic outcomes, many important questions about inflation targeting remain.

In Inflation Targeting, a distinguished group of contributors explores the many underexamined dimensions of inflation PDF targeting—its potential, its successes, and its limitations—from both a theoretical and an empirical standpoint, and for both developed and emerging economies. The volume opens with a discussion of the optimal formulation of inflation-targeting policy and continues with a debate about the desirability of such a model for the United States. The concluding chapters discuss the special problems of inflation targeting in emerging markets, including the Czech Republic, Poland, and Hungary.

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Download PDF: Inflation Targeting: Lessons from the International Experience by Ben S

Download EBOOK Inflation Targeting: Lessons from the International Experience PDF for free Description of the book "Inflation Targeting: Lessons from the International Experience":

How should governments and central banks use monetary policy to create a healthy economy? Traditionally, policymakers have used such strategies as controlling the growth of the money supply or pegging the exchange rate to a stable currency. In recent years a promising new approach has emerged: publicly announcing and pursuing specific PDF targets for the rate of inflation. This book is the first in-depth study of inflation targeting. Combining penetrating theoretical analysis with detailed empirical studies of countries where inflation targeting has been adopted, the authors show that the strategy has clear advantages over traditional policies. They argue that the U ePub.S. Federal Reserve and the European Central Bank should adopt this strategy, and they make specific proposals for doing so.

The book begins by explaining the unique features and advantages of inflation targeting. The authors argue that the simplicity and openness of inflation targeting make it far easier PDF for the public to understand the intent and effects of monetary policy. This strategy also increases policymakers' accountability for inflation performance and can accommodate flexible, even "discretionary," monetary policy actions without sacrificing central banks' credibility. The authors examine how well variants of this approach have worked in nine countries ePub: Germany and Switzerland (which employ a money-focused form of inflation targeting), New Zealand, Canada, the United Kingdom, Sweden, Israel, Spain, and Australia. They show that these countries have typically seen lower inflation, lower inflation expectations, and lower nominal interest rates, and have found that one-time shocks to PDF the price level have less of a "pass-through" effect on inflation. These effects, in turn, are improving the climate for economic growth. The authors warn, however, that the success of inflation targeting depends on operational details, such as how the targets are defined and when they ePub are announced. They also show that inflation targeting is not a panacea that can make inflation perfectly predictable or reduce it without economic costs.

Clear, balanced, and authoritative, Inflation Targeting is a groundbreaking study that will have a major impact on the debate over the right monetary strategy for the coming decades PDF. As a unique comparative study of what central banks actually do in different countries around the world, this book will also be invaluable to anyone interested in how economic policy is made.

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Arguments For and Against Inflation Targeting Policy Interventions

Arguments For and Against Inflation Targeting Policy Interventions Full Text

Inflation targeting is an economic policy in which a central bank publicly determines a target inflation rate and then attempts to steer actual inflation towards the target. For example, in the United States, the Federal Reserve implicitly maintains a target inflation range of 1.7%-2.0%. When inflation falls below this range, the Fed would lower interest rates and raising the money supply in order to push inflation up. Likewise, when inflation rises above the target range, the Fed would raise interest rates and decrease the money supply in order to suppress the high level of inflation. While the inflation rate and the interest rate generally have an inverse relationship, these tools are not always successful in affecting inflation - for example, in response to the 2008 financial crisis and ensuing recession. the Fed raised its target inflation level to 2% and lowered interest rates to nearly zero. This did not, however, succeed in raising inflation to 2%.

Inflation Targeting

The relationship between the money supply and the inflation rate is not exact, but it suggests that a central bank can often affect inflation by adjusting the money supply through higher or lower interest rates.

Argument in Favor of Inflation Targeting

Proponents of inflation targeting argue that a volatile inflation rate has negative effects for an economy. High levels of inflation eat away at savings, increase menu costs and shoe-leather costs, discourage lending, and may create an inflationary spiral that leads to hyperinflation. Inflation targeting has been successful in keeping inflation levels low and avoiding many of these negative effects.

Further, inflation targeting is a transparent way to explain interest rate policy and to anchor consumers' expectations about future inflation. When the central bank announces an inflation target of 2%, the public knows that if inflation goes too far above or below that level, the central bank will take action. This certainty stimulates economic activity. Further, the public's expectations about inflation tend to be a self-fulfilling prophecy. When consumers expect high inflation they spend their money immediately, attempting to avoid higher future prices. This increase in demand leads to higher prices, causing more inflation. Likewise, when consumers expect deflation they tend to save their money, delaying consumption until prices fall. This decrease in demand causes producers to sell their goods at lower prices, and the cycle continues. Inflation targeting sets consumers' expectations, making a certain inflation level easier to maintain.

Arguments Against Inflation Targeting

On the other hand, some argue that the costs of inflation targeting exceed the benefits. If the rule is implemented very strictly, an inflation target could severely limit the central bank's flexibility in responding to changing economic conditions. During a recession, for example, central banks shouldn't raise the interest rate even if inflation is above the target level. Further, sometimes higher inflation is a good thing because it stimulates spending. A central bank with a strict inflation targeting rule, however, would not allow that higher inflation rate even if it were otherwise beneficial.

Others argue that, since inflation isn't necessarily coupled to any factor internal to a country's economy, inflation isn't the best variable to target. Adherents of market monetarism. for example, argue that targeting a nominal national income (nominal GDP) would be more effective than targeting inflation. Others suggest targeting long-run inflation, which takes the exchange rate into account, rather than the short-term inflation rate.

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Inflation targeting

Inflation targeting

Inflation targeting is a monetary policy in which a central bank attempts to keep inflation in a declared target range —typically by adjusting interest rate s. The theory is that inflation is an indication of growth in money supply and adjusting interest rates will increase or decrease money supply and therefore inflation.

Because interest rates and the inflation rate tend to be inversely related. and due to the projected or declared rate being publicly known, the likely moves of the central bank to raise or lower interest rates become more transparent. Examples:

* if inflation appears to be above the target, the bank is likely to "raise" interest rates. This usually (but not always) has the effect over time of cooling the economy and bringing down inflation.

* if inflation appears to be below the target, the bank is likely to "lower" interest rates. This usually (again, not always) has the effect over time of accelerating the economy and raising inflation.

Under the policy, investors know what the central bank considers the target inflation rate to be and therefore may more easily factor in likely interest rate changes in their investment choices. This is viewed by inflation targeters as leading to increased economic stability.

The US Federal Reserve's policy setting committee, the FOMC (Federal Open Market Committee) and its members, regularly publicly state a desired target range for inflation (usually around 1.5-2%), but do not have an explicit inflation target. This is under debate within the Fed, since inflation targeting is usually very successful in other countries because of its transparency and predictability to the markets.

However, some counter that an inflation target would give the Fed too little flexibility to stabilise growth and/or employment in the event of an external economic shock. Another criticism is that an explicit target might turn central bankers into what Mervyn King, now Governor of the Bank of England. had in 1997 colorfully termed "inflation nutters" [As quoted on page 158 of Poole, W. (2006), ‘Inflation targeting,’ speech delivered to Junior Achievement of Arkansas, Inc. Little Rock, Arkansas, 16th February 2006. Published in Federal Reserve Bank of St. Louis Review, vol. 88, no. 3 (May-June 2006), pp. 155-164. ] - that is, central bankers who concentrate on the inflation target to the detriment of stable growth, employment and/or exchange rates. King went on to help design the Bank's inflation targeting policy [Cite web
last = Fraher
first = John
title = King May Be More Irritant Than Ally for Brown at BOE
work = Bloomberg Exclusive
accessdate = 2008-08-05
date = 2008-06-05
url = http://www.bloomberg.com/apps/news?pid=20601109&sid=aKgvGtKRV1IU&refer=home
] and asserts that the nuttery has not actually happened, as does Chairman of the U.S. Federal Reserve Ben Bernanke who states that all of today's inflation targeting is of a flexible variety, in theory and practice. [Cite conference
conference = Annual Washington Policy Conference of the National Association of Business Economists
last = Bernanke
first = Ben S.
title = A Perspective on Inflation Targeting
location = Washington, D.C.
accessdate = 2008-08-05
date = 2003-03-25
url = http://www.federalreserve.gov/Boarddocs/Speeches/2003/20030325/default.htm
]

For the moment, the Fed continues without the strict rules of an explicit target. Former Chairman Alan Greenspan. as well as other former FOMC members such as Alan Blinder. typically agreed with its benefits, but were reluctant to accept the loss of freedom involved; Bernanke, however, is a well-known advocate. [See his many published works on the subject, for example:Bernanke, B. S. and Mishkin, F. S. (1997), ‘Inflation targeting: a new framework for monetary policy?’ in The Journal of Economic Perspectives, vol. 11, no. 2 (Spring 1997), pp. 97-116. ]

History and utilizing countries

Early proposals of monetary systems targeting the price level or the inflation rate, rather than the exchange rate, followed the general crisis of the gold standard after World War I. Irving Fisher proposed a "compensated dollar" system in which the gold content in paper money would vary with the price of goods in terms of gold, so that the price level in terms of paper money would stay fixed. Fisher's proposal was a first attempt to target prices while retaining the automatic functioning of the gold standard. In his "Tract on Monetary Reform" (1923), John Maynard Keynes advocated what we would now call an inflation targeting scheme. In the context of sudden inflations and deflations in the international economy right after World War I, Keynes recommended a policy of exchange rate flexibility, appreciating the currency as a response to international inflation and depreciating it when there are international deflationary forces, so that internal prices remained more or less stable.

Interest in inflation targeting schemes waned during the Bretton Woods system (1944-1971), as they are normally inconsistent with exchange rate pegs such as those prevailing during three decades after World War II. Inflation targeting was pioneered in New Zealand in 1990, [Andrew G Haldane, Targeting Inflation, 1995 ] and is now also in use by the central banks in United Kingdom ( Bank of England ), Canada ( Bank of Canada ), Australia ( Reserve Bank of Australia ), South Korea ( Bank of Korea ), Egypt. South Africa ( South African Reserve Bank ) and Brazil ( Brazilian Central Bank ), among other countries, and there is some empirical evidence that it does what its advocates claim. [Cite news
issue = The New Fed
last = Coy
first = Peter
title = What's The Fuss Over Inflation Targeting?
work = BusinessWeek
accessdate = 2008-08-05
date = 2005-11-07
url = http://www.businessweek.com/magazine/content/05_45/b3958607.htm
]

Inflation is usually measured as the change in prices for consumer goods, called the Consumer price index (CPI). Inflation targeting assumes that this figure accurately represents growth of money supply, but this is not always the case. The most serious exception occurs when factors external to a national economy is the cause of the price increases. The oil price increases since 2003 and the 2007–2008 world food price crisis combined to cause sharp increases in the price of food and consumer goods, which in turn resulted in a sharp increase in CPI. This is especially true in the very emerging markets that often follow the new policy of inflation targeting, because they are often dependent on imported oil or food.

Under such conditions increases in inflation (CPI) is not necessarily coupled to any factor internal to a country's economy and adjusting strictly or blindly adjusting interest rates will potentially be ineffectual and restrict economic growth when it was not necessary to do so. Bernie Fraser. governor of Reserve Bank of Australia from 1989–1996, raised this conern in 2008 in response to another hike in their interest rates. [Cite news |first=Petter |last=Ingemarsson |title=Australia:inflation debate continues |url=http://www.banking-business-review.com/article_feature.asp?guid=A1D4E72E-985B-4B4F-93E2-CDE36653FA94 ]

As an example, since 2006 South Africa – an adherent to inflation targeting – has dogmatically increased interest rates by five percentage points to track a rise in inflation (based on CPIX) even though the rise in CPIX was due to the aforementioned external factors of worldwide fuel and food price increases. [Cite news |first=Ethel |last=Hazelhurst |title=Mboweni blows market away |date= 12 June 2008 |url=http://www.busrep.co.za/index.php?fArticleId=4452714 ] This stands in stark contrast to major central banks such as those of the US, England, Canada, Japan and Europe keeping their interest rates steady over the same period (in some cases even lowering) even though they are exposed to the same global inflationary factors.

The most serious problem associated with inflation targeting is that it is not based on a coherent general dynamic theory. A relatively recent realist dynamic theory - the "dynamic-strategy theory" - suggests that inflation targeting damages the long-run dynamic mechanism. This is supported by the discovery of the growth-inflation curve. [Graeme Snooks, "Longrun Dynamics: A General Economic and Political Theory", London & New York: Macmillan & St Martins Press, 1998 (ch. 11)http://econrsss.anu.edu.au/

snooksweb/Articles/snooksWPEH195.pdf. And Graeme Snooks, "Australia's longrun economic strategy, performance, and policy: A dynamic perspective"," Economic Papers", 27 (2008). http://econrsss.anu.edu.au/pdf/GDSC/WP002.pdf ]

A more essential objection to the strategy of inflation targeting is that it doesn't really comprise a specific set of monetary policy recommendations -as traditional monetarism, for example, did- but constitutes just an explicit statement of the aims of the monetary authority. Since the mid-1990s there have been theoretical attempts to add substance to inflation targeting by proposing explicit monetary rules which could lead to a low and stable inflation rate. One such proposal involves Central Bank intervention in the futures market for the CPI at predefined prices: if prices are expected to exceed the target, speculators would buy future contracts to the Central Bank at the preset prices, thus reducing the money supply until it reaches a level compatible with the target. [Kevin Dowd, "A Proposal to End Inflation", http://ideas.repec.org/a/ecj/econjl/v104y1994i425p828-40.html ] Another proposal consists in fixing a band for Central Bank intervention in the CPI-indexed bond market. The Central Bank commits itself to selling (buying) unlimited amounts of indexed bonds whenever inflationary expectations, as measured by the difference between the non-indexed and the indexed bonds, exceed (are short of) the inflation target. Such an intervention would imply an automatic increase in the money supply whenever inflation expectations are below the target and an automatic fall in the money supply if inflation expectations exceed the target. Necessarily, the level of the money supply will always stand at a range that market participants consider compatible with the attainement of the inflation target [Rollo Tomasi, "El Sistema", http://lacienciamaldita.blogspot.com/2008/08/el-sistema.html ] .

* Monetary policy
* Taylor rule

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