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Inflation Targeting: It'S Not Broke, It Doesn'T Need Fixing, But Can It Survive?

  • PIERRE L. SIKLOS

    ()

    (Department of Economics, Wilfrid Laurier University and Viessmann European Research Centre, Waterloo, ON, N2L 3C5, Canada)

Until the end of 2005 there were few outward signs that the inflation targeting (IT) monetary policy strategy was deemed fragile or that the likelihood of abandoning it was high. In light of the severe economic downturn and the global financial crisis that has afflicted most economies around the world since at least 2008, it is worth reconsidering the question of the fragility of the inflation targeting regime. This paper reprises the approach followed in Siklos (2008) but adds important new twists. For example, the present study asks whether the continued survival of IT is due to the fact that some of the central banks in question did take account of changes in financial stress. The answer is no. Indeed, many central banks are seen as enablers of rapid asset price increases. The lesson, however, is not that inflation targeting needs to be repaired. Instead, refinements should be considered to the existing inflation targeting strategy which has evolved considerably since it was first introduced in New Zealand 20 years ago. Most notably, there should be continued emphasis on inflation as the primary nominal anchor of monetary policy, especially in emerging market economies (EME), even if additional duties are assigned to central banks in response to recent events.

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Article provided by World Scientific Publishing Co. Pte. Ltd. in its journal Journal of International Commerce, Economics and Policy.

Volume (Year): 01 (2010)
Issue (Month): 01 ()
Pages: 59-80

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Handle: RePEc:wsi:jicepx:v:01:y:2010:i:01:p:59-80
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