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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

  • Daniel L. Thornton

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.

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Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2012)
Issue (Month): Jan ()
Pages: 65-81

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Handle: RePEc:fip:fedlrv:y:2012:i:jan:p:65-81:n:v.94no.1
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  1. 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.
  2. D’Agostino, Antonello & Giannone, Domenico & Surico, Paolo, 2006. "(Un)Predictability and macroeconomic stability," Working Paper Series 0605, European Central Bank.
  3. 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.).
  4. Marvin Goodfriend, 2007. "How the World Achieved Consensus on Monetary Policy," NBER Working Papers 13580, National Bureau of Economic Research, Inc.
  5. Guidolin, Massimo & Thornton, Daniel L., 2008. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Paper Series 0977, European Central Bank.
  6. 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.
  7. Daniel L. Thornton, 2009. "The Fed, liquidity, and credit allocation," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 13-22.
  8. 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.
  9. James H. Stock & Mark W. Watson, 2008. "Phillips curve inflation forecasts," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 53.
  10. David 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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