Assessing the Impacts and Policy Alternatives
Edited by Gerald A. Epstein and A. Erinc Yeldan
Chapter 1: Beyond Inflation Targeting: Assessing the Impacts and Policy Alternatives
Gerald Epstein and A. Erinç Yeldan1 INTRODUCTION 1.1 Inflation targeting (IT) is the new orthodoxy of mainstream macroeconomic thought. The approach has now been adopted by 24 central banks, and many more, including those in developing countries, are expressing serious interest in following suit. Initially adopted by New Zealand in 1990, the norms surrounding the IT regime have been so powerful that the central banks of both the industrialized and the developing economies alike have declared that maintaining price stability at the lowest possible rate of inflation is their only mandate. It was generally believed that price stability is a pre-condition for sustained growth and employment, and that ‘high’ inflation is damaging the economy in the long run. In broad terms, the IT policy framework involves ‘the public announcement of inflation targets, coupled with a credible and accountable commitment on the part of government policy authorities to the achievement of these targets’ (Setterfield, 2006, p. 653). As advocated, ‘full fledged’ inflation targeting consists of five components: absence of other nominal anchors, such as exchange rates or nominal GDP; an institutional commitment to price stability; absence of fiscal dominance; policy (instrument) independence; and policy transparency and accountability (Bernanke et al., 1999; Mishkin and Schmidt-Hebbel, 2001, p. 3). In practice, while few central banks reach the ‘ideal’ of being ‘full fledged’ inflation targeters, many others still focus on fighting inflation to the virtual exclusion of other goals. For its proponents, the appropriate inflation target is typically prescribed as maintaining price stability, though...
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