Mishkin on inflation targeting

Mishkin defends inflation targeting in his recent article.

But how can an inflation target remain credible if monetary policy responds to adverse demand shocks when inflation is well above the target, as has happened recently? This is where flexibility comes in.

The modern science of monetary policy argues that it should not try to get inflation to within a tight range over short time horizons. To do so would only result in excessive fluctuations in economic activity. It argues, instead, that when shocks to the economy are sufficiently large, inflation might have to approach the target gradually over time and this could be longer than the two years that is usually assumed as a reasonable time horizon for monetary policy to have its intended effect on inflation.

The problem with this approach is inflation will anyways ease after sometime (unless you are a Zimbabwe). So, how does it help having an inflation targeting central bank.

The main idea behind inflation targets was simple – to anchor inflation expectations and make policy time-consistent. If inflation continues to be up over a shorter period, the public would revise inflation expectations and one expectations go up, it makes the task of bringing it under control later. Eurointelligence points workers of a German firm IG Metal are already claiming the highest wage rise in 16 years. This despite the recent forecasts German economy is expected to slide.

But no one believes in managing inflation as of now. Eurointelligence also has a troublesome news about BIS’ new Chief Economist Stephen Checheeti who says:

in the short-term financial stability must be regarded as the priority, not the fight against inflation. He says the main responsibility of central banks was to protect the real economy from financial sector shocks. Only after that should we have a talk about whether inflation is going to be 2, or 3, or 4 per cent. 

Ignore inflation at your own peril.

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2 Responses to “Mishkin on inflation targeting”

  1. » Mishkin on inflation targeting Says:

    […] Mining Exploration News – Mining Exploration Investment Trade Company Nickel Gold Silver Energy Trad… wrote an interesting post today onHere’s a quick excerptMishkin defends inflation targeting in his recent article. But how can an inflation target remain credible if monetary policy responds to adverse demand shocks when inflation is well above the target, as has happened recently? This is where flexibility comes in. The modern science of monetary policy argues that it should not try to get inflation to within a tight range over short time horizons. To do so would only result in excessive fluctuations in economic activity. It argues, instead, that wh […]

  2. Mishkin report missed Iceland woes « Mostly Economics Says:

    […] would need to revisit quite a few concepts. He is a leading advocate of inflation targeting which needs to be revisited.  His theory of international lender of last resort also needs to be revisited. He also is an avid […]

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