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How did we get to inflation targeting and where do we need to go to now? a perspective from the U.S. experience

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  • Daniel L. Thornton

Abstract

The Federal Reserve is not formally inflation targeting. Nevertheless, it is commonly believed to be an implicit inflation targeter. The evolution to inflation targeting occurred because central banks, most importantly the Federal Reserve, demonstrated that monetary policy could control inflation. As central banks’ credibility for keeping inflation low increased, policy actions became increasingly focused on affecting the growth rate of employment or the unemployment rate. The author argues that this change in emphasis is unlikely to generate positive benefits; more importantly, it endangers the continued effectiveness, and perhaps even the viability, of inflation targeting.

Suggested Citation

  • Daniel L. Thornton, 2012. "How did we get to inflation targeting and where do we need to go to now? a perspective from the U.S. experience," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 65-81.
  • Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:65-81:n:v.94no.1
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    References listed on IDEAS

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    1. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
    2. Daniel L. Thornton, 2009. "The Fed, liquidity, and credit allocation," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 13-22.
    3. Daniel L. Thornton, 2005. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Papers 2004-010, Federal Reserve Bank of St. Louis.
    4. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 47-68, Fall.
    5. Jonas D. M. Fisher & Chin Te Liu & Ruilin Zhou, 2002. "When can we forecast inflation?," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q I, pages 32-44.
    6. Antonello D'Agostino & Domenico Giannone & Paolo Surico, 2005. "(Un)Predictability and Macroeconomic Stability," Macroeconomics 0510024, EconWPA.
    7. Robert H. Rasche & John A. Tatom, 1977. "The effects of the new energy regime on economic capacity, production, and prices," Review, Federal Reserve Bank of St. Louis, issue May, pages 2-12.
    8. Susanto Basu & John G. Fernald, 2009. "What do we know (and not know) about potential output?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 187-214.
    9. Peter Tulip, 2005. "Has output become more predictable? changes in Greenbook forecast accuracy," Finance and Economics Discussion Series 2005-31, Board of Governors of the Federal Reserve System (U.S.).
    10. Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    11. Glenn D. Rudebusch, 2007. "Monetary policy inertia and recent Fed actions," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue jan26.
    12. David L. Reifschneider & Peter Tulip, 2007. "Gauging the uncertainty of the economic outlook from historical forecasting errors," Finance and Economics Discussion Series 2007-60, Board of Governors of the Federal Reserve System (U.S.).
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    Citations

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    Cited by:

    1. Domenico Colucci & Vincenzo Valori, 2012. "Bounded rationality and parameters’ uncertainty in a simple monetary policy model," Working Papers - Mathematical Economics 2012-03, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    2. Thornton, Daniel L., 2014. "Monetary policy: Why money matters (and interest rates don’t)," Journal of Macroeconomics, Elsevier, vol. 40(C), pages 202-213.
    3. Colucci, Domenico & Valori, Vincenzo, 2015. "Stabilizing inflation in a simple monetary policy model with heterogeneous agents," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 108(C), pages 233-244.
    4. repec:taf:applec:v:49:y:2017:i:18:p:1794-1807 is not listed on IDEAS
    5. Noura Abu Asab & Juan Carlos Cuestas, 2015. "Towards Adopting Inflation Targeting in Emerging Markets: The (A)symmetric Transmission Mechanism in Jordan," Working Papers 2015013, The University of Sheffield, Department of Economics.
    6. Claudiu Tiberiu Albulescu & Christian Aubin & Daniel Goyeau, 2017. "Stock prices, inflation and inflation uncertainty in the U.S.: testing the long-run relationship considering Dow Jones sector indexes," Applied Economics, Taylor & Francis Journals, vol. 49(18), pages 1794-1807, April.

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