Frederic Mishkin

Inflation Targeting: True Progress or Repackaging of an Old Idea?

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Abstract:
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.

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