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Inflation Targeting
Report

Inflation Targeting

A Monetary Policy Regime Whose Time Has Come and Gone

David Beckworth
Mercatus Center, 2014
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Editorial Rating

8

Qualities

  • Innovative

Recommendation

Alan Greenspan is famous for warning about the “irrational exuberance” of financial markets when he was Federal Reserve chairman. However, it was precisely his conviction that central bankers couldn’t determine when asset prices were unduly frothy that allowed one bubble after another to form and that made his successor hesitate to intervene in the run-up to the Great Recession. According to economist David Beckworth, central banking history is replete with policies – such as the gold standard and the Phillips curve – that were great successes at first but that later stumbled. getAbstract recommends Beckworth’s thoughtful look at the latest “last word” in monetary policy – inflation targeting – to economists, financial professionals and dedicated Fed watchers.

Take-Aways

  • Inflation targeting – in which a central bank broadcasts its goal for the rate of inflation and then aligns interest rates to achieve that goal – hasn’t responded adequately to today’s economic challenges.
  • Inflation targeting has been most effective in redressing disturbances in demand.
  • But supply shocks – due to, for example, technological advances or the availability of cheaper labor in Asia – induce central bankers to make counterproductive adjustments in interest rates that subsequently lead to boom-and-bust cycles.

About the Author

David Beckworth is an assistant professor at Western Kentucky University.

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