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Monday, April 04, 2005

Hubbard and Feldstein on Explicit Inflation Targeting by the Fed

This is a follow up to this post that noted that Bernanke is on record as favoring an explicit inflation target for Fed policy. Since Hubbard and Feldstein’s names are also being bandied about as potential successors to Greenspan, what are their views on inflation targeting, a question posed here?

Let’s begin with Hubbard. Here is a statement by Edward Gramlich discussing Hubbard’s support of an inflation target:

...Now, the Fed has never done this. The Fed has never adopted a formal inflation targeting regime. There is a huge debate among academic economists about whether it should. And the current chair of the Council of Economic Advisors, for example, is on record for saying we should. Glen Hubbard, the recent chair of the Council, head of a piece in the Wall Street Journal just yesterday saying we should. So there are a number of people that are urging the Fed to go over to a more formal regime. But there are also some kickback. There is an argument that we have more -- what you get with inflation targeting regime is enhanced credibility. There's an argument that the Fed contrasted to some of these other central banks already has that and we have the advantage of flexibility.

Now that is a huge debate that is going on. You'll read about it. I'm not going to take a position on it this morning. I can see value in arguments on both sides...

Here’s a link to the WSJ article by Hubbard discussing his support of explicit inflation targeting.

What about Feldstein, does he favor an explicit inflation target? The answer is no as noted in this quote from the Financial Market Center (quotes on inflation targeting by Ball and Rivlin can also be found in the same place):

An inflation target might actually weaken the credibility of a central bank if the central bank cannot or does not achieve the target value or range, especially if this failure to deliver persists for several years. Alternatively, a central bank might actually set its policy at some point in time to achieve the target inflation rate in order to reinforce its credibility even though doing so entails other outcomes, or risks, that it would otherwise want to avoid…The paper by Kenneth Rogoff presented at this conference shows how inflation rates have declined in virtually every country around the world over the past few decades, including those with and those without explicit inflation targeting policies. It does not appear to be necessary to tie the hands of central bankers with an explicit rule or numerical target in order to achieve low inflation." -- Martin Feldstein, President, National Bureau of Economic Research, Professor of Economics, Harvard University, and former Chairman, Council of Economic Advisors (1982-1984) (comment at Monetary Policy in an Uncertain Environment, FRB Kansas City Symposium, Jackson Hole, Wyoming, August 28-30, 2003)

Therefore, Bernanke and Hubbard favor explicit inflation targets, a direction I believe the Fed is headed as noted in this post, while Feldstein is much less amenable to giving up discretion. Who is chosen will affect how the Fed conducts monetary policy. Feldstein appears to favor a continuation of Greenspan's preference for more discretion than inflation targeting rules allow, while Bernanke and Hubbard are in favor of explicit commitment to an inflation target to enhance Fed credibility and transparency.

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    Posted by on Monday, April 4, 2005 at 09:45 AM in Economics, Monetary Policy | Permalink  TrackBack (0)  Comments (1)


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