Essays On Inflation Targeting

Since the breakdown of the Bretton Woods international monetary system in the early 1970s, most countries have faced bouts of high and volatile inflation as they sought a suitable nominal anchor.Columns 2 and 4 of Table 1 report the average inflation rates and their associated standard deviations, respectively, since the beginning of 2008.Inflation rates stayed remarkably low and stable during this otherwise turbulent period.Today, some 20 central banks—representing economies from small to large, emerging markets to advanced—practice some version of inflation targeting.1 Approaches differ in the details, but it is striking how similar inflation-targeting practice is across a diverse set of countries with distinct economic and institutional landscapes.Although the central banks of the three largest advanced economies—the Bank of Japan, the European Central Bank, and the Federal Reserve—don’t explicitly identify themselves as practicing inflation targeting, all three have enunciated numerical longer-term inflation goals, a cornerstone principle of inflation targeting.The crisis and economic downturns left virtually no traces in terms of the ability of central banks to maintain price stability.This is an important achievement in and of itself, but also because the stability of inflation provided many central banks with room to take aggressive actions to foster economic recovery.Some chose to explicitly adopt an inflation-targeting framework with all the bells and whistles, while others did not.However, in the following, I do not distinguish between countries that have explicitly adopted inflation targeting and others, like the United States, whose behavior is in many ways similar to inflation targeting but which have not made such specific commitment.Since the adoption of inflation targeting and similar approaches, inflation in these countries has been relatively quiescent.The first column of Table 1 shows the average rates of inflation in a number of countries in the decade before the global financial crisis (1998–2007).

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