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The Fed’s inflation target and the background of its announcement

Author

Listed:
  • Dániel Felcser

    (Magyar Nemzeti Bank (central bank of Hungary))

  • Kristóf Lehmann

    (Magyar Nemzeti Bank (central bank of Hungary))

Abstract

In the first stage of the crisis, the Federal Reserve (Fed) rapidly embarked on interest rate cuts followed by several rounds of substantial quantitative easing. However, the marked monetary easing and the persistently low interest rates triggered mounting fears of inflation, calling into question the Fed’s commitment to medium-term price stability. In response to criticism and to the risks relating to monetary policy, in January 2012 the Fed announced an explicit inflation target of 2 per cent to exploit the fact that a numerical inflation target improves the transparency of the central bank, helps to anchor inflation expectations and fosters consensus about the definition of price stability among policymakers. With this move, the Fed added key elements of inflation targeting to its monetary strategy. The announcement confirmed that inflation targeting is becoming increasingly popular and may be an attractive and efficient monetary strategy, even for the largest central banks.

Suggested Citation

  • Dániel Felcser & Kristóf Lehmann, 2012. "The Fed’s inflation target and the background of its announcement," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 7(3), pages 28-37, October.
    • Handle: RePEc:mnb:bullet:v:7:y:2012:i:3:p:28-37
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    References listed on IDEAS

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    1. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, March.
    2. Refet S Gürkaynak & Andrew Levin & Eric Swanson, 2010. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from the U.S., UK, and Sweden," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1208-1242, December.
    3. Charles I. Plosser, 2012. "A progress report on our monetary policy framework: Forecasters Club, New York, New York, February 29, 2012," Speech 64, Federal Reserve Bank of Philadelphia.
    4. Ben S. Bernanke & Michael Woodford, 2004. "The Inflation-Targeting Debate," NBER Books, National Bureau of Economic Research, Inc, number bern04-1, March.
    5. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, April.
    6. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, March.
    7. Aizenman, Joshua & Marion, Nancy, 2011. "Using inflation to erode the US public debt," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 524-541.
    8. Kristóf Lehmann, 2012. "International experiences with unconventional central bank instruments," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 7(2), pages 24-30, June.
    9. Charles I. Plosser, 2011. "Strengthening our monetary policy framework through commitment, credibility, and communication," Speech 58, Federal Reserve Bank of Philadelphia.
    10. James B. Bullard, 2012. "Inflation targeting in the USA," Speech 191, Federal Reserve Bank of St. Louis.
    11. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, vol. 86(Jul), pages 51-80.
    12. Aizenman, Joshua & Marion, Nancy, 2009. "Using Inflation to Erode the U.S. Public Debt," Santa Cruz Department of Economics, Working Paper Series qt6xf174rs, Department of Economics, UC Santa Cruz.
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    Cited by:

    1. Dániel Felcser, 2013. "How should the central bank react to the VAT increase?," MNB Bulletin (discontinued), Magyar Nemzeti Bank (Central Bank of Hungary), vol. 8(1), pages 35-41, January.
    2. István Ábel & Orsolya Csortos & Kristóf Lehmann & Annamária Madarász & Zoltán Szalai, 2014. "Inflation targeting in the light of lessons from the financial crisis," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 13(4), pages 35-56.

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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