The Bank of Japan has been pursuing quantitative and qualitative monetary easing since 2013, but has failed to achieve its target of a stable 2% inflation rate. This column explores the Bank’s recent practices and performance, and identifies four structural factors that have contributed to the limited impact of unconventional monetary easing on aggregate demand and inflation. The Bank now needs to come up with more objective projections for the timing of achieving its price stability target.
Sayuri Shirai, 16 March 2017
Hassan Afrouzi, Olivier Coibion, Yuriy Gorodnichenko, Saten Kumar, 13 October 2015
The importance of the general public’s inflation expectations is increasingly being emphasised, but surveys of firms’ expectations are notably absent. This column explores the extent to which inflation expectations of firms in New Zealand are anchored. The findings indicate that managers show little anchoring of inflation expectations, despite 25 years of inflation targeting by the central bank. Most managers depend to a large extent on their personal shopping experience to make inferences about aggregate inflation.
Michael Bordo, Pierre Siklos, 12 December 2014
Central bank credibility is critically linked to communication and commitment. This column analyses the historical evolution of credibility, showing its prewar peak and the subsequent dip from which it did not fully recover until the 1980s. Inflation targeting has played a key role in establishing credibility in both developed and emerging market economies.
Joshua Aizenman, Daniel Riera-Crichton, 28 November 2014
The growing importance of sovereign wealth funds and the diffusion of inflation targeting have impacted the adjustment of Latin American Countries to terms of trade and financial shocks. This column shows that sovereign welfare funds provide another margin of stabilisation. This role is of greater relevance for inflation targeting countries and during periods of heightened volatility. Inflation targeting regimes relegate the goal of real exchange rate stabilisation and counter-cyclical fiscal policy to its sovereign wealth fund via a fiscal rule.
Pranjul Bhandari, Jeffrey Frankel, 21 August 2014
Central banks, especially in developing countries, still seek transparent and credible communication. Yet signalling intentions through forward guidance or commitment sometimes creates undesirable constraints. This column argues that central bank pronouncements phrased in terms of nominal GDP are less likely to run afoul of the supply and trade shocks so common in developing countries, compared to pronouncements phrased in terms of inflation.
Colin Ellis, Haroon Mumtaz, Pawel Zabczyk, 06 August 2014
This column reports on empirical evidence showing that monetary policy shocks in the UK had a bigger impact on inflation, equity prices, and the exchange rate during the inflation targeting period. Related changes in the transmission of policy shocks to bond yields point to more efficient management of long run inflation expectations.
Joshua Aizenman, 03 July 2014
After a promising first decade, the Eurozone faced a severe crisis. This column looks at the Eurozone’s short history through the lens of an evolutionary approach to forming new institutions. German dominance has allowed the euro to achieve a number of design objectives, and this may continue if Germany does not shirk its responsibilities. Germany’s resilience and dominant size within the EU may explain its ‘muddling through’ approach to the Eurozone crisis. Greater mobility of labour and lower mobility of under-regulated capital may be the costly ‘second best’ adjustment until the arrival of more mature Eurozone institutions.
Michael Hatcher, Patrick Minford, 11 May 2014
Inflation targeting and price-level targeting have excited economists for decades. This column reviews a survey on the merits of price-level targeting. The latter could potentially help monetary policy deal with the zero bound on nominal interest rates. Such beneficial effects depend on rational expectations and a New Keynesian structure of the economy.
David Cobham, 16 September 2013
The Bank of England is searching for an alternative activist monetary policy. This column argues that inflation targeting is better than previous frameworks but there is room for improvement. Faced with exchange rate and housing prices problems, the Bank was unable to modify the framework to suit. To avoid such problems, the Bank should be given more goal-independence as well as instrument-independence.
Lars E.O. Svensson, 09 September 2013
Sweden’s average inflation has consistently undershot its inflation target. This column argues that this has led to higher average unemployment and a higher household-debt ratio. The author, a former Deputy Governor of the Riksbank, argues that Sweden’s central bank is not fulfilling its mandate.
Laurence Ball, 24 May 2013
Since the double-digit inflation of the 1970s, central banks have sought to reduce inflation and keep it low. This column argues that recent history teaches us that inflation has fallen too low. Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions.
Lucrezia Reichlin, Richard Baldwin, 14 April 2013
Inflation targeting did not prevent financial instability before the Crisis nor did it provide sufficient stimulus after the Crisis. In a new Vox eBook, 14 world-renowned scholars, practitioners and market participants analyse inflation targeting and its future. They argue that inflation targeting should be refined not replaced. Indeed, it is needed now more than ever to keep expectations anchored while the advanced economies work their way through today’s slow growth, rickety banks, and over-indebted public sectors.
Jeffrey Frankel, 19 December 2012
The time is right for the world’s central banks to rethink how they conduct monetary policy. This column argues that central banks should follow the lead of Mark Carney, the Bank of England’s new Governor, in considering a move to nominal GDP targeting. If nominal GDP targeting is introduced in two distinct phases, its introduction can deliver the advantage of some stimulus now – when it is needed – while satisfying central bankers’ reluctance to abandon their cherished low inflation target.
Christian Daude, 10 December 2012
Latin American central banks are facing new challenges in the form of unprecedented levels of uncertainty and exchange rate appreciation pressures. This column, focusing on Brazil, Chile, Colombia, Peru and Mexico, argues that there is an overestimation of the potential output in several Latin American economies, a lack of an explicit policy direction from central banks, and lacklustre frameworks for macroprudential policy. Although inflation targeting has served countries in Latin America well, significant risks remain.
Michael Biggs, Thomas Mayer, 10 September 2012
Even before the crisis, there were some who stressed that monetary policy should keep an eye on asset bubbles and the growth of credit. This column argues that the policy of inflation targeting, used widely in the 1990s and 2000s, did indeed lead to excessive credit growth that eventually bred financial instability.
Jeffrey Frankel, 19 June 2012
The current economic crisis has called into question the role of monetary policy, particularly inflation targeting and its oversight of asset bubbles and supply side shocks. This column is an obituary to inflation targeting and call for nominal GDP targeting to replace it.
Paul De Grauwe, 26 October 2011
The Eurozone crisis plays on to a familiar tune. Finance ministers meet on the weekend only for markets to dismiss their efforts the following Monday. This column argues that Europe’s leaders have lost touch, that the ECB has the firepower but is not prepared to use it, and that the outcome of all this is depressingly clear: Defeat by the financial markets.
Roman Horváth, Jakub Matějů, 22 June 2011
How are inflation targets set and why do they differ from country to country? This column suggests that macroeconomic characteristics such as inflation, inflation volatility, GDP growth, and foreign inflation matter for the process of inflation target setting. It also argues that central bank credibility is important but that the role of central bank independence and government political orientation is limited.
Heleen Mees, 03 May 2011
The latest figures from the US show that the consumer price index rose 0.5% in March, whilst the core personal consumption expenditure price index rose only 0.1%. This column explains the roles of these competing measures and argues that US monetary policymakers should pay close attention to headline inflation. It warns that neglecting headline inflation risks feverish boom-and-bust cycles with prolonged periods of high unemployment.
David Miles, 25 February 2011
David Miles of the Bank of England's Monetary Policy Committee talks to Viv Davies about ‘Monetary Policy in Extraordinary Times’, a speech he delivered in London on 23 February 2011. Two very large shocks have hit the UK economy – the near collapse of the banking system and, more recently, a sharp increase in commodity, energy and food prices. The first shock is deflationary, the second inflationary. Miles discusses how best to set monetary policy in the wake of these shocks and analyses how regulation and monetary policy can most effectively reduce the likelihood of future financial instability. [Also read the transcript]