Weakness of Implementation of Inflation Target

Weakness of Implementation of Inflation Target

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Weakness of Implementation of Inflation Target

Supporting nominal revenue targets criticized the tendency of applying an inflation target to ignore output fluctuations focusing only on the price level. According to Scott Sumner, a market monetarist, argues that in the United States, the Federal Reserve’s central bank mandate is to stabilize output and price levels so that the nominal revenue targets will be more in line with the Fed’s policy.

Australian economist John Quiggin, who also supports nominal revenue targets, said it would “maintain or enhance transparency associated with the system based on predetermined targets, while restoring the lost balance of monetary policy based solely on price stability objectives” . According to him, the recession in late 2000 based on the implementation of the inflation target in the economic environment, low inflation is a “barrier to growth”. In fact, it is not true that the inflation target only focuses on the rate of inflation and ignores economic growth. Instead they tend to do “flexible inflation targets” where the central bank seeks to keep inflation near target except in periods of time that would cause too much output volatility.

Former Fed Chairman Alan Greenspan and former European Central Bank President Jean-Claude Trichet are also heavily criticized when applying an inflation target. They are considered “ignoring or even praising unsustainable bubbles when there is speculation in the housing sector that generates crises and reacts too slowly until evidence emerges.”

Harvard University economist Jeffrey Frankel suggests that targeted nominal revenue or product price targeting will succeed in suppressing inflation as the dominant monetary policy regime.

The debate continues and many observers estimate that the inflation target will continue to be the dominant monetary policy regime, possibly after certain modifications.

Empirically, it is not clear that the central bank that implements the inflation target has better inflation control. Some economists argue that better institutions increase the chances for the country to successfully target inflation. Regarding the impact of the recent financial crisis, John Williams, a high-ranking Federal Reserve official, concluded that “when measured by inflation behavior since the crisis, the inflation target has achieved its goal”.

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