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Central Banks and the Shift Away from Inflation Targeting

Mar 14, 2018

Albert Einstein is quoted as having said “the definition of insanity is doing the same thing over and over again, but expecting different results”. As Enda Curran and Jana Randow posit in their article “Central Banks Are Looking for New Ways to Meet Inflation Targets”, many central banks are adopting this philosophy into their operational structures. Numerous central banks have missed on their inflationary targets, and have done so for years. Is it possible that the practice of targeting inflation too narrowly is resulting in an inability to meet the goals set? This would seem to be the sentiment of several central banks as they have begun to embrace a change in tactics.

As the authors mention in the article, there are several cases from various world economies that demonstrate a shifting mindset away from traditional inflation targeting. The U.S Fed has discussed the possibility of targeting inflation to a range as opposed to targeting a specific inflationary point. New Zealand, the first economy to practice inflation targeting, is now expanding its efforts to include an emphasis on jobs. The BOC, after having missed its inflationary target consistently in recent years is contemplating adding new criteria to its policies as well, even considering the possibility of nominal GDP targeting. It can be difficult to identify which of these factors is most effective, and therein lies the problem.

While it is encouraging that central banks are willing to be dynamic and adaptable, the difficulty lies in the fact that there is no one-size-fits-all answer. Correcting economic issues on a national scale requires individual tinkering that has many traditional economists hesitant. Mario Draghi, President of the ECB, is certainly among this group as was evidenced last Thursday when he protested that there are “serious costs about changing course on credibility and the anchoring of expectations”. While Draghi may be right about the costs involved, it is also clear that the lack of effectiveness of central banks to meet their inflation goals is a situation that needs to be remedied.

To read the full article cited, click here.