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

  • Dániel Felcser


    (Magyar Nemzeti Bank (central bank of Hungary))

  • Kristóf Lehmann


    (Magyar Nemzeti Bank (central bank of Hungary))

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    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.

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    Article provided by Magyar Nemzeti Bank (Central Bank of Hungary) in its journal MNB Bulletin.

    Volume (Year): 7 (2012)
    Issue (Month): 3 (October)
    Pages: 28-37

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    Handle: RePEc:mnb:bullet:v:7:y:2012:i:3:p:28-37
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    1. 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.
    2. Joshua Aizenman & Nancy Marion, 2009. "Using Inflation to Erode the U.S. Public Debt," NBER Working Papers 15562, National Bureau of Economic Research, Inc.
    3. Charles I. Plosser, 2011. "Strengthening our monetary policy framework through commitment, credibility, and communication," Speech 58, Federal Reserve Bank of Philadelphia.
    4. Frederic S. Mishkin, 2004. "Why the Federal Reserve Should Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 117-127, 03.
    5. Gill Hammond, 2012. "State of the art of inflation targeting," Handbooks, Centre for Central Banking Studies, Bank of England, edition 4, number 29, 07.
    6. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 51-80.
    7. Benjamin M. Friedman, 2004. "Why the Federal Reserve Should Not Adopt Inflation Targeting," International Finance, Wiley Blackwell, vol. 7(1), pages 129-136, 03.
    8. James B. Bullard, 2012. "Inflation targeting in the USA," Speech 191, Federal Reserve Bank of St. Louis.
    9. Kristóf Lehmann, 2012. "International experiences with unconventional central bank instruments," MNB Bulletin, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 7(2), pages 24-30, June.
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