This preview shows page 1. Sign up to view the full content.
Unformatted text preview: ve real interest rates, targeting inflation at a moderate rate, for example at 1.01.5 percent, would be worth considering as an effective way of dispelling deflation. The need for positive inflation expectations to overcome the problem of the zero bound of the nominal interest rate was correctly recognised, and the Board member noted that inflation targeting was a means to achieve positive inflation expectations.44 According to the minutes, no substantial discussion followed. The next discussion of inflation targeting did not occur for four months. The minutes of 27 November 1998 recorded discussion of the pros and cons of introducing inflation targeting and also some technical questions. According to the minutes, one member proposed that the Bank would encourage the uncollateralised overnight call rate to move on average around 0.15 percent, aiming at raising the annual average rate of increase in the consumer price index (all items) to zero in the medium term. Other members commented on this proposal. One member asked three technical points: (1) How could a situation that is neither inflationary nor deflationary be described over price indicators, "rate of increase at zero" or "an increase by a small margin"? (2) What indicators should be used in measuring prices, the consumer price index (all items) as suggested in the proposal or other alternative price indicators? (3) How long the target period could be to achieve certain results? These are essential questions, and if they had been seriously discussed, the introduction of inflation targeting might have been feasible as early as end 1998. However, there seemed to be some objections and scepticism towards inflation targeting in this meeting. One member doubted that announcing an inflation target could have effects on the activities of people expecting deflation. Another member questioned the need 43. The minutes record a detailed summary of discussion of the MPM and are made public after they are approved in the MPM of one to two months later. Names of discussants are not disclosed, except for those who propose a motion for voting decision and voting records. Transcripts with names will be disclosed in the distant future. 44. Another member remarked that inflation targeting was worth considering as it could work on peoples expectations, an opinion that the member had been expressing publicly ... The member had advocated that in an extremely severe economic situation in which an optimal monetary policy was to realise negative real interest rates, targeting inflation at a moderate rate, for example at 1.01.5 percent, would be worth considering as an effective way of dispelling deflation concerns (Minutes of the Board on 16 July 1998). Inflation Targeting and Japan: Why has the Bank of Japan not Adopted Inflation Targeting? 255 for an announcement altogether, since it was known that the Bank was pursuing price stability.45 In 1999, inflation targeting was discussed fairly regularly. Inflation target(ing), or the target (range) of inflation rate, was mentioned at least once from February 1999 to February 2000. In several of the meetings, a substantial discussion took place (evidenced by comments of more than two persons, and more than five counts of inflation target recorded in the minutes). In particular, the discussions on 28 June 1999, 27 October 1999 and 10 February 2000 seem to have been very interesting. At the 28 June 1999 meeting, One of the members, who considered that deflationary concern persisted, advocated further monetary easing through inflation targeting and expansion of the monetary base. He gave six reasons for this proposal, including its effects on expected inflation. The rise in expected inflation greater than the nominal long-term interest rate would lower the real long-term interest rate. Several members commented on this assertion and proposal. Some were sceptical of the argument that a rise in nominal interest rates would be acceptable as long as real interest rates declined, saying that economic activities were affected by both nominal and real interest rates. The criticism of inflation targeting based on the fear of rising long-term interest rates was debated without reaching a firm conclusion. In the MPM of 27 October 1999, the minutes recorded a lengthy summary of discussions. This was probably the first Board discussion that contained serious debates between advocates and sceptics of inflation targeting.46 There were two or more advocates of inflation targeting and others who were sceptical. Advocates argued that inflation targeting had the merit that it enabled the Bank to indicate a medium- to long-term commitment. Sceptics argued that it was too simple to think that setting a numerical target would increase the transparency of monetary policy, and it was necessary to discuss the pros and cons as well as the feasibility of inflation targeting giving due consideration to its basic nature. One member compared a medium-term inflation target, which allows short-term flexibility, and a rule-like infla...
View Full Document
This note was uploaded on 05/12/2010 for the course COMMERCE finc at University of Sydney.