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Conducting monetary policy with inflation targets

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  • George A. Kahn
  • Klara Parrish

Abstract

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.

Suggested Citation

  • George A. Kahn & Klara Parrish, 1998. "Conducting monetary policy with inflation targets," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-32.
  • Handle: RePEc:fip:fedker:y:1998:i:qiii:p:5-32:n:v.83no.3
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Manfred J. M. Neumann & Jurgen Von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 127-148.
    2. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Hannover Economic Papers (HEP) dp-341, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    3. Francisco Dakila, Jr., 2001. "Alternative Monetary Policy Rules for the Philippines," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 38(2), pages 1-36, December.
    4. Frömmel, Michael & Garabedian, Garo & Schobert, Franziska, 2011. "Monetary policy rules in Central and Eastern European Countries: Does the exchange rate matter?," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 807-818.
    5. Bugarin, Mauricio & Carvalho. Fabia A., 2006. "Heterogeneity of Central Bankers and Inflationary Pressure," Insper Working Papers wpe_68, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    6. Kursat Kunter & Norbert Janssen, 2002. "Credibility Of Monetary Regimes : Is Inflation Targeting Different?," Discussion Papers 0201, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    7. C. Andrade, Eduardo, 2003. "Quotas in Brazilian Public Universities: Good or Bad Idea?," Insper Working Papers wpe_37, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    8. Thórarinn G. Pétursson, 2004. "The effects of inflation targeting on macroeconomic performance," Economics wp23_thorarinn, Department of Economics, Central bank of Iceland.
    9. Thorarinn G. Petursson, 2005. "Inflation Targeting and its Effects on Macroeconomic Performance," SUERF Studies, SUERF - The European Money and Finance Forum, number 2005/5 edited by Morten Balling, March.
    10. Valdivia, Daney & Loayza, Lilian, 2010. "Adopción de metas de inflación y su impacto en las expectativas de inflación y volatilidad del crecimiento económico: evidencia empírica para Bolivia
      [Inflation targeting and its impact on the infl
      ," MPRA Paper 37328, University Library of Munich, Germany, revised 25 Aug 2011.

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    Keywords

    Monetary policy ; Inflation (Finance);

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