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Conducting monetary policy with inflation targets

  • George A. Kahn
  • Klara Parrish

Since the early 1990s, a number of central banks have adopted numerical inflation targets as a guide for monetary policy. The targets are intended to help central banks achieve and maintain price stability by specifying an explicit goal for monetary policy based on a given time path for a particular measure of inflation. In some cases the targets are expressed as a range for inflation over time, while in other cases they are expressed as a path for the inflation rate itself. The measure of inflation that is targeted varies but is typically a broad measure of prices, such as a consumer or retail price index.> At a conceptual level, adopting inflation targets may necessitate fundamental changes in the way monetary policy responds to economic conditions. For example, inflation targeting requires a highly forward-looking monetary policy. Given lags in the effects of monetary policy on inflation, central banks seeking to achieve a target for inflation need to forecast inflation and adjust policy in response to projected deviations of inflation from target. But central banks without an explicit inflation target may also be forward looking and equally focused on a long-run goal of price stability. Thus, at a practical level, adopting inflation targets may only formalize a strategy for policy that was already more or less in place. If so, targets might improve the transparency, accountability, and credibility of monetary policy but have little or no impact on the way policy instruments are adjusted to incoming information about the economy. Kahn and Parrish examine how central banks have changed their policy procedures after adopting explicit inflation targets. They conclude that, while inflation targets have perhaps improved the transparency, accountability, and credibility of monetary policy, it is difficult to discern any significant and systematic changes in the way policymakers adjust policy instruments to incoming information after adopting inflation targets.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (1998)
Issue (Month): Q III ()
Pages: 5-32

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Handle: RePEc:fip:fedker:y:1998:i:qiii:p:5-32:n:v.83no.3
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  1. Andreas Fischer, 1993. "Inflation Targeting: The New Zealand and Canadian Cases," Cato Journal, Cato Journal, Cato Institute, vol. 13(1), pages 1-27, Spring/Su.
  2. George A. Kahn & Robert Hampton, Jr., 1990. "Possible monetary policy responses to the Iraqi oil shock," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 19-32.
  3. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  4. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  5. Gordon H. Sellon, Jr. & Stuart E. Weiner, 1996. "Monetary policy without reserve requirements: analytical issues," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-24.
  6. Andrew Haldane, 1997. "Some Issues in Inflation Targeting," Bank of England working papers 74, Bank of England.
  7. Pierre Duguay & Stephen Poloz, 1994. "The Role of Economic Projections in Canadian Monetary Policy Formulation," Canadian Public Policy, University of Toronto Press, vol. 20(2), pages 189-199, June.
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