Konstantin Egorov, Dmitry Mukhin, 19 November 2021

Recent evidence shows that most international prices are set in dollars, leading to highly asymmetric spillovers between the US and other economies. This column discusses the normative implications of this fact. The authors argue that inflation targeting is optimal in non-US economies, while the use of capital controls is not. A depreciation of the dollar is unlikely to cause a currency war, but US policy does not fully internalise global spillovers. The US benefits from the dominant status of its currency.      

Lucile Crumpton, Ethan Ilzetzki, 14 October 2021

In July, the ECB issued its first Strategic Review since 2003. The latest CfM-CEPR survey investigates one component of the announced policy shift: the new definition of price stability. Most members of the panel of experts on the European economy support the ECB explicitly allowing inflation to exceed its target for extended periods to make up for below-target inflation in the past. This 60% majority has divided views on the optimal alternative policies, with the largest share supporting average inflation targeting and some members supporting nominal GDP targeting or hybrid policies. 40% of the panel would prefer to maintain the current policy of traditional inflation targeting.  

Seppo Honkapohja, Nigel McClung, 29 April 2021

Recent challenges have generated interest in new monetary policy frameworks, including average inflation targeting. The Federal Reserve adopted this policy in 2020, but they have not communicated many details about the policy itself. This column argues that an opaque average inflation targeting policy can de-anchor inflation expectations from the target equilibrium – even if expectations are initially well-anchored. Policymakers should be cautious when implementing average inflation targeting.

Sebastian Edwards, Luis Cabezas, 08 April 2021

The nominal exchange rate plays a dual role in macroeconomic adjustments – it is part of the transmission mechanism of monetary policy, and it also helps accommodate external and domestic shocks through its effect on the real exchange rate. This column uses disaggregated price index data from Iceland to test how exchange rate pass-through varies with the international tradability of goods and with the monetary policy framework. It shows that pass-through is significantly higher for tradables relative to nontradables. In addition, it finds that improvements in the credibility of the central bank are associated with declines in the exchange rate pass-through. 

Gene Ambrocio, Andrea Ferrero, Esa Jokivuolle, Kim Ristolainen, 06 March 2021

Central banks often have inflation targets at the centre of their monetary policy regimes. This column presents survey data from 613 leading economists to explore their views on these inflation targets and wider policies within their countries of residence. The results suggest that maintaining the prevailing inflation target (for central banks that have one) has more support than changing it does. But more respondents are pessimistic about central banks’ ability to meet these targets, particularly in the euro area.

Ignazio Angeloni, 03 December 2020

Gauti Eggertsson, Sergey Egiev, Alessandro Lin, Josef Platzer, Luca Riva, 21 October 2020

The Federal Reserve has recently announced a new policy strategy of average inflation targeting. The column argues that while this is unambiguously a positive step, it may not – under all circumstances – subscribe to a sufficiently aggressive make-up strategy when the zero lower bound is binding. This is particularly likely to be the case if episodes of high unemployment are not associated with material fall in inflation, a scenario that seems empirically relevant. The authors suggest alternatives that could do better, such as a targeting rule that treats the dual objective of the Federal Reserve in a symmetric way, or one that aims at minimising cumulative deviation of nominal GDP from trend.

Barry Eichengreen, Poonam Gupta, Rishabh Choudhary, 12 October 2020

Inflation targeting in India is a work in progress, but the interim assessment presented in this column suggests that significant progress has already been achieved to date.  This progress is evident in the reduced volatility of a range of inflation-related outcomes (the volatility of inflation, of inflation expectations, and of exchange rates and equity markets) and in the stronger anchoring of inflation expectations, which appears to have enhanced the ability of the Reserve Bank of India to respond to the exceptional shock of the COVID-19 pandemic. The Bank would appear to be one of a substantial number of inflation-targeting central banks that were able to respond more forcefully than their non- inflation-targeting counterparts.

Olivier Coibion, Yuriy Gorodnichenko, Edward S. Knotek II, Raphael Schoenle, 30 September 2020

On 27 August 2020, the Federal Reserve announced the adoption of a new strategy of ‘average inflation targeting’, which is to replace traditional inflation targeting. This column uses a daily survey of US households to study how this announcement affected inflation expectations. It finds a small uptick in the share of households reporting to have heard news about monetary policy on the day of the announcement, but hearing about the news did not appear to affect their expectations. Even providing households with information on average inflation targeting directly did not change expectations relative to households who received information on traditional inflation targeting.

Aakriti Mathur, Rajeswari Sengupta, 03 September 2020

Since the 2008 Global Crisis, significant attention is paid to central bank communication, especially for countries with an inflation targeting mandate. This column analyses the monetary policy statements of the Reserve Bank of India, which formally adopted inflation targeting in 2016. It finds that the length of statements has dramatically declined, the linguistic complexity has improved, and the content is more focused on inflation topics since the regime change. In addition, there is a strong relationship between the length of statements and stock market volatility, highlighting the real impacts of effective communication.

Gaston Gelos, Umang Rawat, Hanqing Ye, 20 August 2020

Emerging markets and developing countries are particularly vulnerable to economic shocks such as that posed by COVID-19, not least because of their often weaker monetary policy frameworks. This column discusses the extent to which these economies have been able to react to the crisis with a loosening of monetary policy. While the initial inflation level is an important determinant of a country’s ability to cut rates, additional institutional factors can also affect their ability to conduct countercyclical monetary policy during the crisis.   

Maritta Paloviita, Markus Haavio, Pirkka Jalasjoki, Juha Kilponen, Ilona Vänni, 28 July 2020

The introductory statements made by the ECB are some of the most important sources of insight into the central banks’ policy goals. This column presents a textual analysis which seeks to measure the tone of the statements, with the aim of estimating the Governing Council's ‘loss function’. The results suggest that the ECB has been either more averse to inflation above the 2% ceiling, or that the de facto inflation target has been considerably below this threshold. The results also suggest that an inflation aim of 2%, combined with asymmetry, is a plausible specification of the ECB's wider preferences.

Jean-Paul L'Huillier, Raphael Schoenle, 20 July 2020

Interest rates have remained close to zero in many economies since the Great Recession. This column explores the policy of raising the inflation target in order to generate greater macroeconomic ‘room’. Central banks face constraints when trying to achieve this extra room. The rationale is that by raising the inflation target, the private sector responds by increasing price flexibility. This lowers the potency of monetary policy and thereby endogenously removes part of the room generated by the higher target.

,

You are invited to a CEPR webinar on:

Inflation Targeting: The Monetary Vaccine?

Join us on Wednesday 13 May 2020
10:00-11:00 (BST, London), 11:00 - 12:00 (CST)

In June 2007, CEPR issued its first Policy Insight, authored by Andrew K Rose: "Are International Financial Crises a Barbarous Relic? Inflation Targeting as a Monetary Vaccine". Far more importantly, the first iPhone was released. The iPhone has stood the test of time well; over two billion have been sold, and Apple became the first trillion-dollar company. Inflation targeting has stood up just as well. Almost no one has experienced an international financial crisis on an iPhone, because of inflation targeting; currency crises have been crushed!

In this webinar, Andrew Rose presents CEPR Policy Insight 100, where he revisits Inflation Targeting and examines how it has withstood the test of time. Lars Svensson, former Deputy Governor of the Sveriges Riksbank, will join the discussion and consider Inflation Targeting in the new world of Covid-19. Tim Phillips will moderate the session.

Speaker:
Andy K Rose, Dean, NUS Business School and CEPR

Discussant:
Lars E O Svensson, Stockholm School of Economics and CEPR

Moderator:
Tim Phillips, CEPR

Register on Zoom: https://us02web.zoom.us/webinar/register/9715889444562/WN_75e_wlOBRHac0U...

Fredrik N G Andersson, Lars Jonung, 08 May 2020

Negative interest rates were once seen as impossible outside the realm of economic theory. However, recently several central banks have imposed such rates, with prominent economists supporting this move. This column investigates the actual effects of negative interest rates, taking evidence from the Swedish experience during 2015-2019. It is evident that the policy’s effect on the inflation rate was modest, and that it contributed to increased financial vulnerabilities. The lesson from the experiment is clear: Do not do it again.

Jongrim Ha, M. Ayhan Kose, Franziska Ohnsorge, 11 April 2019

Emerging market and developing economies have achieved a remarkable decline in inflation since the early 1970s, supported by robust monetary policy frameworks, strengthening of global trade, financial integration, and the disruptions caused by the global crisis. The column argues that a continuation of low and stable inflation in these countries is not guaranteed. If this wave of structural and policy-related factors loses momentum, elevated inflation could re-emerge. Policymakers may find that maintaining low inflation is as difficult as achieving it.

John D. Burger, Francis Warnock, Veronica Cacdac Warnock, 19 September 2018

A large share of Turkey’s bonds are denominated in foreign currencies, and the Turkish lira has depreciated. This recalls the currency mismatches that contributed to many crises in the 1990s. The column argues that many emerging economies like Turkey's are better able to avoid these crises thanks to improved policies, such as inflation targeting, that have helped foster local currency bond markets. Emerging markets policymakers must not backslide on this progress if they want to maintain financial stability.

Davide Debortoli, Jinill Kim, Jesper Lindé, Ricardo Nunes, 17 September 2018

Previous studies have suggested that for central banks, a focus on inflation stabilisation is enough to stabilise other macroeconomic variables, and that focusing on economic activity can even be harmful. Using a model similar to those in use at central banks, this column studies the welfare implications of increasing the weight on economic activity in the central bank’s objective. The results suggest that stabilising measures of economic activity should be one of the primary objectives of central banks, as important as or even more important than stabilising inflation around its target. 

Alfonso Rosolia, 14 September 2018

Given the role firms play in the transmission of monetary policy decisions, it is useful to understand how they form their inflation expectations. The column uses data from Italy to show that firms are attentive to the economic environment, even if they are not completely aware of the latest developments. They are also able to extract relevant information to update their expectations from ECB communications.

Marcel Fratzscher, Christoph Grosse Steffen, Malte Rieth, 17 August 2018

Does inflation targeting help absorb large shocks? This column shows that it implies higher output growth and lower inflation when countries are hit by natural disasters. Hard targeting works in these cases; soft targeting does not. This has impacts for how we evaluate the success of inflation targeting during the global crisis, but also for the debate on flexible inflation targeting.

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