Central-bank credibility, reputation and inflation targeting in historical perspective
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.
Central banks have been around since the 17th century. Central bank credibility has waxed and waned during this period. In many countries, an important contributor to the achievement of credibility has been the introduction of inflation targeting.
inflation targeting, central bank credibility
Liquidity and foreign asset management challenges for Latin American countries
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.
The Global Financial Crisis (GFC) validated the buffer value of international reserves and the active management of buffer funds. These issues are especially pertinent for commodity exporters, for whom the high volatility of commodity terms of trade translates into large shocks that impact the real exchange rate and GDP.
Global crisis International finance
GFC, SWFs, sovereign welfare funds, inflation targeting
Central banks in developing countries should consider targeting nominal GDP
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.
Central banks still seek transparent and credible communication. But signalling intentions, through forward guidance or some degree of commitment to an intermediate target, poses a difficult tradeoff. The advantages of transparency and credibility versus the disadvantages of waking up one day to find that unexpected developments have turned past statements into unwanted constraints on current monetary policy.
inflation targeting, emerging markets, NGDP targeting
The evolving effectiveness of UK’s monetary policy
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.
Over the past five decades, major industrialised economies underwent deep structural changes. These typically included dramatic shifts in macroeconomic policy and globalisation-induced changes in competition, technological advances, and financial innovation. This raises several concerns for policymakers, including whether the channels through which monetary policy affects the economy have changed over time, and what that might mean for how policy should be conducted.
Europe's nations and regions Monetary policy
inflation targeting, UK, policy shocks
The euro crisis: Muddling through, or on the way to a more perfect euro union?
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.
The short history of the Eurozone has been remarkable and unprecedented – the euro project has moved from the planning board to a vibrant currency within less than ten years. Otmar Issing’s optimistic speech in 2006 reflects well the buoyant assessment of the first decade of the euro – an unprecedented formation of a new currency without a state.1 Observers viewed the rapid acceptance of the euro as a viable currency and the deeper financial integration of the Eurozone and the EU countries as stepping stones toward a stable and prosperous Europe.
Institutions and economics International finance Monetary policy
Germany, ECB, eurozone, inflation targeting, euro, institutions, Eurozone crisis, GIIPS
Inflation targeting vs price-level targeting: A new survey of theory and empirics
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.
Price stability is the key goal of almost every central bank in the world. But does that mean stable price levels or inflation rates? The main difference between inflation targeting and price-level targeting is the consequence of missing the target.
inflation targeting, price-level targeting, rational expectation, zero bound
Monetary policy in the UK: Time for change?
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.
Before the Global Crisis it seemed as though the problems of monetary policy in the UK had been solved:
inflation targeting, Bank of England, UK, QE
Is the Riksbank neglecting the price-stability objective, counteracting full employment, and increasing household debt?
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.
How do we know whether or not the Riksbank is neglecting the price-stability objective? Could it be that the Riksbank is not only neglecting the price-stability objective but is also counteracting the Riksdag’s and the Government’s full-employment objective as well as increasing household indebtedness?
inflation targeting, Riksbank
The case for 4% inflation
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.
Many central banks have adopted a common policy – an inflation target near 2%. These central banks include the Fed (which calls it a ‘long run goal’), the ECB (which targets inflation ‘below, but close to 2%’) and the central banks of most other advanced economies.
inflation targeting, 2%
Is inflation targeting dead? Central banking after the Crisis
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.
Before the Crisis, inflation targeting had become the de facto standard framework for monetary policy. Even non-inflation targeters like the ECB and the Federal Reserve built their monetary policy around the idea of commitment to a quantitative objective for medium-term inflation.
EU institutions Macroeconomic policy
inflation targeting, central bank independence, quantitative easing