Summary of Inflation Targeting

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Inflation Targeting summary
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Recommendation

Alan Greenspan is famous for warning about the “irrational exuberance” of financial markets when he was Federal Reserve chairman. However, it was precisely his conviction that central bankers couldn’t determine when asset prices were unduly frothy that allowed one bubble after another to form and that made his successor hesitate to intervene in the run-up to the Great Recession. According to economist David Beckworth, central banking history is replete with policies – such as the gold standard and the Phillips curve – that were great successes at first but that later stumbled. getAbstract recommends Beckworth’s thoughtful look at the latest “last word” in monetary policy – inflation targeting – to economists, financial professionals and dedicated Fed watchers.

About the Author

David Beckworth is an assistant professor at Western Kentucky University.

 

Summary

Inflation targeting – in which a central bank broadcasts its goal for the rate of inflation and then aligns interest rates to achieve that goal – came into use in the 1990s after decades of high inflation. As a monetary policy, inflation targeting has had its successes, but it hasn’t responded adequately to today’s economic challenges. As a result, proponents have suggested improving the regime by, for example, incorporating consideration of asset prices and tools to limit money supply growth, or by allowing more short-term flexibility to the inflation target while...


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