Inflation_Targeting_Bernanke - FRB Speech, Bernanke-A...

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Remarks by Governor Ben S. Bernanke At the Annual Washington Policy Conference of the National Association of Business Economists, Washington, D.C. March 25, 2003 A Perspective on Inflation Targeting One of the more interesting developments in central banking in the past dozen years or so has been the increasingly widespread adoption of the monetary policy framework known as inflation targeting . The approach evolved gradually from earlier monetary policy strategies that followed the demise of the Bretton Woods fixed-exchange-rate system--most directly, I believe, from the practices of Germany's Bundesbank and the Swiss National Bank during the latter part of the 1970s and the 1980s. For example, the Bundesbank, though it conducted short-term policy with reference to targets for money supply growth, derived those targets each year by calculating the rate of money growth estimated to be consistent with the bank's long-run desired rate of inflation, normally 2 percent per year. Hence, the Bundesbank indirectly targeted inflation, using money growth as a quantitative indicator to aid in the calibration of its policy. Notably, the evidence suggests that, when conflicts arose between its money growth targets and inflation targets, the Bundesbank generally chose to give greater weight to its inflation targets (Bernanke and Mihov, 1997). 1 The inflation-targeting approach became more explicit with the strategies adopted in the early 1990s by a number of pioneering central banks, among them the Reserve Bank of New Zealand, the Bank of Canada, the Bank of England, Sweden's Riksbank, and the Reserve Bank of Australia. Over the past decade, variants of inflation targeting have proliferated, with newly industrialized and emerging-market economies (Brazil, Chile, Israel, Korea, Mexico, South Africa, the Philippines, and Thailand, among others) being among the most enthusiastic initiates. Most recently, this policy framework has also been adopted by several transition economies, notably the Czech Republic, Hungary, and Poland. 2 Central banks that have switched to inflation targeting have generally been pleased with the results they have obtained. The strongest evidence on that score is that, thus far at least, none of the several dozen adopters of inflation targeting has abandoned the approach. 3 As an academic interested in monetary policy, several years ago I became intrigued by inflation targeting and went on to co-author a book and several other pieces about this approach. 4 As I continue to follow developments in the area, I must say, however, that discussions of inflation targeting in the American media remind me of the way some Americans deal with the metric system--they don't really know what it is, but they think of it as foreign, impenetrable, and possibly slightly subversive. So, in the hope of cutting through some of the fog, today I will offer my own, perhaps somewhat idiosyncratic, view of inflation targeting and its potential benefits, at least in what I consider to be its best-practice
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This note was uploaded on 02/27/2011 for the course ECONOMICS 201 taught by Professor P during the Spring '11 term at Columbia College.

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Inflation_Targeting_Bernanke - FRB Speech, Bernanke-A...

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