Mainstream economists miss the target again. Fed economist Marvin Goodfriend shows that the US is an inflation targeter....Laurence Ball and Niamh Sheridan find that inflation targeting doesn’t matter. All brought to you by the good people at NBER:
“Inflation Targeting in the United States?” by Marvin Goodfriend. The paper begins by tracing the origins of the case for inflation targeting in postwar US monetary history. It describes five aspects of inflation targeting practiced implicitly by theGreenspan Fed. It argues that (1) low long run inflation should be an explicit priority for monetary policy, (2) as a practical matter it is not desirable for the Fed to vary its short run inflation target (3) strict inflation targeting can be regarded as effcient constrained countercyclical stabilization policy. Finally, the paper suggests that the Fed publicly acknowledge its implicit priority for low long run inflation, that Congress recognize that priority, and that in return representatives of the FOMC consider participating in a monetary policy forum to better inform the public and congressional oversight committees about current monetary policy.
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“Does Inflation Targeting Matter?” by Laurence Ball and Niamh Sheridan. Economists have long sought the ideal framework for monetary policy. Recently, many economists have come to believe that inflation targeting represents that ideal. They cite its many benefits, including solving the dynamic consistency problem that results in high average inflation; reducing inflation variability; stabilizing output; and locking in expectations of low inflation. Tthe authors examine twenty OECD countries, seven that adopted inflation targeting during the 1990s and thirteen that did not. The study period lasted through 2001 for most of the countries – for others, the study period lasted only through 1998 because of the advent of the Euro. While economic performance varied widely across individual countries, the authors find no evidence that inflation targeting on average improves performance as measured by the behavior of inflation, output, or interest rates. Looking at inflation targeting countries alone, the authors find that their performance improved between the period before targeting and the targeting period. For some, inflation fell and became more stable, and output growth also stabilized. However, countries that did not adopt inflation targeting also experienced improvements around the same time period.
