Is Inflation Targeting Best-Practice Monetary Policy?

Jon Faust, Board of Governors of the Federal Reserve System, Dale W. Henderson
<span title="">2004</span> <i title="Board of Governors of the Federal Reserve System"> <a target="_blank" rel="noopener" href="" style="color: black;">International Finance Discussion Paper</a> </i> &nbsp;
ranking the ITF relative to some set of ad hoc alternatives, such as the current practices at central banks around the world. Of course, the ITF community is now large and varied. We focus mainly on the industrialized countries. One might say that we consider the role of the ITF in a low-inflation steady-state and do not address the important question of how it might help in reaching such a steady-state. In much of the paper we seek to highlight some generic issues. In doing so, we do not mean
more &raquo; ... o suggest that there are not important differences among the practices of ITF central banks: Our points will apply in varying degrees to ITF and other central banks. 1 Our main message can be summarized succinctly. Common wisdom and conventional models suggest that best-practice policy can be summarized in terms of two goals: First, get mean inflation right; second, get the variance of inflation right. The ITF is of great help in achieving the first goal; whether it helps in achieving the second is more problematic. The argument goes as follows. Everyone now agrees that mean inflation should be modest. The ITF may be seen as a constructive attempt to cement the current consensus on this point. Unfortunately, agreement regarding the mean inflation rate has few practical implications at any finite horizon. Many of the most contentious debates over the conduct of policy in the postwar era are not about the mean but about the variance of inflation. That is, under what conditions should the central bank allow or promote movements of inflation around the mean in order to promote other goals such as real and 1 There are excellent taxonomies of the approaches used by different
<span class="external-identifiers"> <a target="_blank" rel="external noopener noreferrer" href="">doi:10.17016/ifdp.2004.807</a> <a target="_blank" rel="external noopener" href="">fatcat:5qvhaypczbexhka3bvjcq7bfpi</a> </span>
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