THE INFLATION TARGETING DEBATE

In this lecture I discuss five questions raised by the inflation targeting debate: 1) Does inflation targeting improve economic performance? 2) Is inflation targeting consistent with the dual mandate? 3) Can central bank transparency go too far? 4) Would a price level target be better than an inflation target? 5) Would a point target be better than a target range? I believe that the answers are as follows. The general conclusion from the empirical evidence is that inflation targeting is associated with an improvement in overall economic performance. Inflation targeting is consistent with the dual mandate in which a central bank is directed to promote both price stability and full employment, but central banks need to make this consistency clearer in their communication strategies. Central bank transparency does go to far when central banks announce their projections of the future policy path or announce their objective functions. Recent research and ongoing events in Japan suggest that a price level target is an important weapon that needs to be kept in the arsenal of monetary policymakers. Target ranges for inflation turn out to be an excellent way to cope with the time-inconsistency problem and provide incentives that get monetary policy to be very close to optimal policy in which the time- inconsistency problem is avoided altogether.