December 23, 2003
Many economists believe that targeting a specific rate of inflation -- measured by increases in price indexes and called inflation targeting -- represents the ideal form of monetary policy. Proponents say it results in a lower average inflation rate, a more stable inflation rate and stabilizes output.
However, a new study by the National Bureau of Economic Research finds no benefits are derived from adopting inflation targeting:
- Countries that adopted inflation targeting did experience lower and more stable inflation rates than in previous years.
- But that happened in countries that did not initiate inflation targeting.
The authors point out that their results do not provide an argument against inflation targeting, since they do not find that it does any harm. Indeed, there may be political benefits, which were not measured. Targeting may produce a more open policymaking, aligning the role of the central bank with the principles of democratic society.
Source: Les Picker, "Does Inflation Targeting Matter," NBER Digest, September 2003; based on: Laurence Ball and Niamh Sheridan, "Does Inflation Targeting Matter?" National Bureau of Economic Research, Working Paper, No. 9577, March 2003.
For study text
Browse more articles on Economic Issues