Inflation Targeting: True Progress or Repackaging of an Old Idea?
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In 1990, a new monetary strategy was born, inflation targeting. Inflation targeting
embodies five key elements: 1) public announcement of medium-term numerical targets for
inflation; 2) an institutional commitment to price stability as the primary, long-run goal of
monetary policy and a commitment to achieve the inflation goal; 3) an information-inclusive
strategy in which many variables and not just monetary aggregates are used in making
decisions about monetary policy; 4) increased transparency of the monetary policy strategy
through communication with the public and the markets about the plans and objectives of
monetary policymakers; and 5) increased accountability of the central bank for attaining its
inflation objectives. Since the initial adoption of inflation targeting in early 1990 by New
Zealand, inflation targeting has grown in popularity: over twenty countries have adopted
this monetary strategy, and no country has abandoned inflation targeting, once adopted.
unless it opted to give up monetary policy independence altogether by joining the European
Monetary Union (e.g., Finland and Spain).
How new an idea is inflation targeting? After all, many central banks have had a goal of price stability well before the advent of inflation targeting. Is inflation targeting
really a major step forward in central bank practice, or is it just a repackaging of old wine in
a new bottle?
This paper examines these questions by providing a history of economic ideas and
central bank practices over the last forty-five years that have led up to the development of
inflation targeting. I will argue that there has been an evolution of ideas and central bank
practices that have led to current thinking on what constitutes best practice in central
banking and inflation targeting is the culmination of this process. Inflation targeting is
something new and is true progress because it has many advantages over earlier monetary
policy strategies. It is not revolutionary, however: rather it is a refinement of what has gone
on before. Indeed, inflation targeting continues to evolve as we speak and will continue to
be refined in the future.
Source: Working paper
Mishkin, Frederic. "Inflation Targeting: True Progress or Repackaging of an Old Idea?" Working paper, Columbia Business School, 2006.