Daily Archives: February 2, 2012

Has inflation targeting reached its sell-by date? Given the Federal Reserve’s formal adoption of an inflation target only last week, the answer is presumably No. There is, nevertheless, something odd about the enduring enthusiasm among central bankers for inflation targeting. The pursuit of price stability, after all, was supposed to be the best way of delivering overall economic stability. Yet, despite the widespread adoption of inflation targets, the developed world succumbed in 2008 to the biggest economic and financial crisis in generations.

This terrible performance surely should have led to a period of introspection, a desire to examine the role of inflation targeting in contributing to the crisis. Central bankers, however, have mostly brushed objections to one side, preferring to lay the blame on regulatory and supervisory failures or the misdemeanours of individual titans of finance.

Price stability is, of course, desirable, but inflation targeting itself is in danger of turning into a fetish. It’s time for a thorough re-examination of its contribution to our economic welfare. Continue reading »