Wednesday, June 20, 2012

The Evolution of Monetary Policy

Jeffrey Frankel makes the case that monetary policy is moving away from inflation targeting:
It is with regret that we announce the death of Inflation Targeting. The monetary regime, known affectionately as “IT” to its friends, evidently passed away in September 2009. That the demise of IT has not been officially announced until now testifies to the esteem in which it was widely held, its usefulness as a figurehead for central banks, and fears that there might be no good candidates to assume its position as preferred anchor for monetary policy.
Frankel goes on to argue that nominal GDP targeting is likely to be the candidate to replace IT. It might be a bit premature to say IT is dead, but I do think the flaws of IT--even the flexible version of it--have been made apparent over the past few years. It is time to retarget the Fed.

P.S. Josh Hendrickson provides a thoughtful reply to David Andolfatto on nominal GDP targeting.

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