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Wednesday, November 16, 2005

Explicit Inflation Targets and Flexibility

Fed Chair nominee Ben Bernanke reaffirmed his support of explicit inflation targets or ranges in today's confirmation hearing and one of the main questions concerning inflation targeting is how it affects flexibility. This is not a new question. Here's former Fed Governor Laurence H. Meyer at the University of California at San Diego Economics Roundtable,  July 17, 2001 with a common view on this topic:

Inflation Targets and Inflation Targeting, by Fed Governor Laurence Meyer: Retaining Flexibility with the Dual Mandate The key issue for me is whether setting an explicit inflation target would reduce the flexibility of policymakers to pursue a dual mandate and select the preferred point along the tradeoff between output and inflation variability. ... Specifically, would implementing an explicit inflation target inevitably also raise the response parameter on the inflation gap relative to that on the output gap? In my view, the answer is that this need not be the case, but I agree that there is some risk of this outcome. It seems to me, however, that it is less likely if the move to an explicit inflation target is taken in the context of a reaffirmation of the dual mandate.

Quoting Bernanke in his opening statement today on implementing explicit inflation targets:

I would propose further action only if a consensus can be developed that taking such a step would further enhance the ability of the FOMC to satisfy its dual mandate of achieving both stable prices and maximum sustainable employment.

    Posted by on Wednesday, November 16, 2005 at 12:42 AM in Economics, Fed Speeches, Monetary Policy | Permalink  TrackBack (1)  Comments (4)

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    » A primer on inflation targeting from New Economist

    Yesterday Fed chairman designate Ben Bernanke confirmed that he is a supporter of inflation targeting (see Mark Thoma and Edward Hugh), so I thought readers might be interested in knowing more about the issue. The Financial Markets Center have just pub... [Read More]

    Tracked on Wednesday, November 16, 2005 at 05:37 AM


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