A CASE FOR INFLATION TARGETS
October 10, 2006
Unusually high levels of uncertainty regarding the appropriate future paths of monetary policy in the United States and Japan underscores the desirability of adopting inflation targets, says John H. Makin, a visiting scholar at the American Enterprise Institute (AEI).
These targets could provide more knowable outcomes to changes in monetary policy, thereby reducing the risks involved. For example:
- An inflation target with triggers for persistent divergences from the target would provide the U.S. Federal Reserve Bank with a framework for clarifying its tactics, reducing volatility in the economy.
- The Bank of Japan would face less risk of falling back into deflation with a credible inflation target, preferably one above zero.
But inflation targeting is not a cure-all, says Makin. However, it is a useful tactic within a central bank strategy of maintaining low and stable inflation to enhance growth. It also helps to anchor inflation expectations as a means to enhance the effectiveness of central bank policy actions by minimizing their cost in terms of either lost output or employment.
Both the U.S. Federal Reserve and the Bank of Japan could add to their already substantial contributions to global growth and stability by moving toward adoption of inflation targeting.
Source: John H. Makin, "A Case for Inflation Targets in the United States and Japan," American Enterprise Institute, October 2006.
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