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A Snapshot of Infl ation Targeting

A Snapshot of Infl ation Targeting - 6 Kenneth N Kuttner A...

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A Snapshot of In fl ation Targeting in its Adolescence Kenneth N Kuttner 1 Abstract The paper fi rst seeks to clarify the de fi nition of in fl ation targeting (IT), comparing ʻ practical ʼ versus ʻ theoretical ʼ de fi nitions of the term, and how they relate to one another. Second, the paper reviews the range of IT practice across the 20 or so current in fl ation targeters and discusses the ways in which that practice has evolved in the past 10–15 years. Third, it assesses the criticism that IT is insuf fi ciently ʻ fl exible ʼ , considering both what in fl ation-targeting central banks say they do, and how they have responded in practice to output fl uctuations. At least for New Zealand, the United Kingdom, Sweden and Canada, the implementation of IT appears to be relatively fl exible – more so than one might suspect on the basis of many in fl ation- targeters ʼ (ITers) rhetoric. 1. Introduction It is not every day that one gets to observe the diffusion and evolution of a new monetary policy framework. However, the development, and subsequent spread, of in fl ation targeting, beginning in the early 1990s, has created just such an opportunity. In fl ation-targeting central banks now number upwards of 20, and it seems likely to become the monetary policy framework of choice for a wide range of countries, displacing more problematic alternatives, such as money targeting or exchange- rate-based frameworks. The popularity of in fl ation targeting should not be too surprising. At the most basic level, IT offers the possibility of a nominal anchor, free of the vagaries of the foreign exchange market, and the often-capricious behaviour of monetary aggregates. Many central banks have found IT to be a useful organising principle for focusing research, disciplining policy discussions, and communicating policy actions to the general public. And for a transition or emerging market economy, adopting IT provides an opportunity for the central bank to clearly de fi ne its objectives and delineate its responsibilities vis à vis other of fi cial policy institutions. But IT, as a policy framework, is only 15 years old – quite young, compared with other, more seasoned policy frameworks, and still very much in its adolescence. Like many teenagers, IT is often misunderstood. And also like many teenagers, it still has some issues it needs to work out. 1. I am indebted to Georgios Chortareas, Özer Karagedikli, and Anders Vredin for making their respective central banks ʼ historical forecast data available. Malcolm Edey, Christopher Kent, Rick Mishkin, Tony Richards, and Lars Svensson provided a number of valuable comments and suggestions. Ben Pierce assisted with the research.
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7 A Snapshot of In fl ation Targeting in its Adolescence Any developmental issues IT might have are certainly not caused by a lack of attention. Following something of a lull, during which many macroeconomists were preoccupied by Y2K, asset-price bubbles, and the ʻ new economy ʼ , the pace of research on in fl
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A Snapshot of Infl ation Targeting - 6 Kenneth N Kuttner A...

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