Central banks are nothing if not dedicated followers of fashion. Less than a month after the Federal Reserve opted for an explicit inflation target, the Bank of Japan has followed suit.
However, the BoJ’s adoption of an inflation target probably owes more to political pressure than the whims of its central bankers; unlike Ben Bernanke, BoJ governor Masaaki Shirakawa has never been a proponent of the framework.
And this perhaps explains why the BoJ has been more original than most on how it plans to target inflation. Read more
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The Federal Open Market Committee meets on Tuesday and Wednesday to set monetary policy for the coming month and a half.
The meeting – to be followed by one of chairman Ben Bernanke’s press conferences – could see the FOMC announce an inflation target. This from the FT’s US economics editor Robin Harding: Read more
Harvard professor and famed textbook writer Greg Mankiw on Sunday argued the Federal Reserve should adopt a price-level target.
A price-level target aims for a certain level of inflation over the course of an economic cycle. In contrast, an inflation target has policymakers focus on a fixed point in the future.
Advocates argue price-level targeting is superior because of its flexibility. It allows for higher inflation when demand is anaemic with a view to reducing inflation below target once the economy recovers. As the Harvard professor notes, this would enable the Fed to reap the benefits that higher expected inflation would have in lowering interest rates without having to argue for the “political non-starter” of targeting inflation of, say, 4 per cent. Read more
The one question to earn a wry smile from Fed chairman Ben Bernanke today was on whether the Fed will adopt an explicit inflation target.
His answer was one of his most informative. In essence, he said that: (a) he wants one; (b) it’s not imminent; (c) there’s no need for a change in the law; and (d) there would have to be consultation and communication with both Congress and the public. Read more
Bloomberg have a nice story today about the possibility of an explicit Fed inflation target. I’d also noted the uptick in speeches on the subject recently such as those by Dennis Lockhart and Charles Plosser.
The way I’ve understood it since taking on this job is that a large majority of the FOMC, led by Ben Bernanke, would like to adopt an explicit inflation objective. It was heavily discussed last autumn as a way to anchor inflation expectations when the danger was deflation. Those discussions have continued, and with press conferences out of the way, an inflation objective is the obvious subject for the Fed’s working group on communications. Read more
Dividing the FOMC up into hawks and doves is only marginally productive but inescapable at the moment. Dennis Lockhart is a moderate member of the committee, and representative of a number of colleagues with backgrounds in banking rather than economics. A speech he has given today suggests he is in favour of further QE barring a change in the data.
To opt for more quantitative easing at this juncture is a big decision. Today I will walk you through the thicket of considerations that lead me, at this moment, to be sympathetic to more monetary stimulus in the near future.
One of the main things I took from chairman Bernanke’s speech last Friday was a wish to refocus attention on the Fed as an inflation-targeting central bank.
Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature.
Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy. Thus, while central bankers can choose the value of inflation they wish to target, the sustainable unemployment rate can only be estimated, and is subject to substantial uncertainty.
Moreover, the sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation.
I think this highlights the enormous problems caused by targeting inflation without being willing to be admit that you have an inflation target. The Fed fondly imagines that the world understands it is targeting inflation. It is not a surprise it believes this: it talks to economists who run models in which it has a 2 per cent inflation target and to hacks like me who are misspending our lives studying Fed-speak. Read more
Today’s speeches by Fed chairman Ben Bernanke and BOJ governor Masaaki Shirakawa are available on their respective websites.
There was also a brief Q&A session, however, during which Mr Bernanke was asked to comment on Olivier Blanchard’s suggestion of a 4 per cent inflation target to increase the scope to cut rates in a crisis. I’ve transcribed his response below: Read more
The Bank of Japan is not going to let the government foist an explicit inflation target on it without a fight. In a fascinating speech given in New York yesterday BoJ governor Masaaki Shirakawa argues that inflation targets are one reason that central banks allowed asset price bubbles to develop. For good measure he suggests that the world learned the wrong lessons from Japan’s deflation – and implies that US monetary policy in the 2000s was too loose as a result.
Mr Shirakawa’s argument:
Second, some political, economic and social dynamics influenced central bankers, and it became difficult for them to conduct monetary policy based on factors other than the inflation rate. This mechanism is quite subtle. The logic that price stability is a precondition for economic stability and that the independence of the central bank is necessary for price stability, became gradually but firmly established in the 1990s. At the same time, the granting of independence naturally called for the strengthening of accountability. An easily identifiable benchmark was desired. The framework which best fulfilled such needs was inflation targeting. However, under an inflation targeting regime, the debate tends to center on the relationship between the target inflation rate and the actual or expected inflation rate.
As a result, the cost of justifying adjustments in monetary policy becomes quite high in the eyes of central bankers, when such adjustments are aimed to deal with imbalances which appear in forms other than price indices. Economists focused their attention to the linkage between the output gap and the inflation rate, while awareness toward financial imbalances was limited.
A little more interest from the back-and-forth about deflation that regularly attends hearings of the finance committee of Japan’s lower house. According to Bloomberg/BusinessWeek:
“I think inflation targeting is an attractive policy,” [finance minister Naoto Kan] said at parliament in Tokyo today. “We could have a goal of 1 percent or something a little higher, like 2 percent, and work with the BOJ until that goal is met.”
That takes Mr Kan a little closer to substantive disagreement with the BOJ. The BOJ is (a) opposed to an explicit inflation target and (b) happy with its existing ‘understanding of price stability’ of a 0-2 per cent positive range centred on 1 per cent. Read more
The International Monetary Fund is ahead of the game when it comes to learning lessons from the economic crisis. In a paper, which will be published today and has been seen by the Financial Times, Olivier Blanchard, the IMF’s chief economist, is refreshingly honest about the lessons from the crisis and logical in the ideas for reform floated.
This is the IMF working as it should. Even if some of its ideas do not fit the current orthodoxy.
The suggestion which leaps out of the page as most controversial is that inflation targets should be raised, implying that in normal times inflation would be closer to 4 per cent and interest rates would be higher than over the past few decades. That would give monetary policy more scope to be loosened in a future crisis, leaving less for fiscal policy to do. Read more