Reflections on Inflation Targeting

Starting with the Reserve Bank of New Zealand, over the past twenty years a large number of central banks have adopted inflation targeting as their framework for monetary policy. As the second decade of inflation targeting comes to a close, a retrospective assessing how well it has worked, what lessons have been learned and what challenges may lie ahead is most appropriate. During much of the past twenty years I have observed the introduction and practice of inflation targeting at various central banks around the world with great interest. But throughout this period, I have been affiliated with central banks that did not espouse the inflation targeting approach and have thus observed its practice as an outsider. I would like to thank the Norges Bank for giving me the opportunity to be part of this event and I am especially thankful to Deputy Governor Jan Qvigstad for the invitation to offer my personal reflections on inflation targeting. Before I proceed, I should note that the views I express are my own and do not necessarily reflect those of the Governing Council of the European Central Bank. What is inflation targeting? There are several and sometimes competing or conflicting definitions, reflecting the numerous variations encountered in policy practice and the evolution of the framework itself. In a thorough study of the first experiences with inflation targeting, Bernanke et al (1999) suggested the following description: " Inflation targeting is a framework for monetary policy characterised by the public announcement of official quantitative targets (or target ranges) for the inflation rate over one or more time horizons, and by explicit acknowledgement that low, stable inflation is monetary policy's primary long-run goal. Among other important features of inflation targeting are 1 vigorous efforts to communicate with the public about the plans and objectives of the monetary authorities, and, in many cases, mechanisms that strengthen the central bank's accountability for attaining those objectives " (Bernanke et al. 1999, p. 4). In my view, inflation targeting, as originally developed and practiced, is a robust way of achieving and maintaining price stability. It is certainly not the only way of achieving this goal. That said, inflation targeting can be more effective than other alternatives in achieving price stability under some circumstances. If so, it would be useful to identify what these circumstances may be. At the same time, judging from the experience of the past two decades, …