Inflation Targeting: Lessons from the International Experience

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Overview

How should governments and central banks use monetary policy to create a healthy economy? Traditionally, policymakers have used such strategies as controlling the growth of the money supply or pegging the exchange rate to a stable currency. In recent years a promising new approach has emerged: publicly announcing and pursuing specific targets for the rate of inflation. This book is the first in-depth study of inflation targeting. Combining penetrating theoretical analysis with detailed empirical studies of countries where inflation targeting has been adopted, the authors show that the strategy has clear advantages over traditional policies. They argue that the U.S. Federal Reserve and the European Central Bank should adopt this strategy, and they make specific proposals for doing so.

The book begins by explaining the unique features and advantages of inflation targeting. The authors argue that the simplicity and openness of inflation targeting make it far easier for the public to understand the intent and effects of monetary policy. This strategy also increases policymakers' accountability for inflation performance and can accommodate flexible, even "discretionary," monetary policy actions without sacrificing central banks' credibility. The authors examine how well variants of this approach have worked in nine countries: Germany and Switzerland (which employ a money-focused form of inflation targeting), New Zealand, Canada, the United Kingdom, Sweden, Israel, Spain, and Australia. They show that these countries have typically seen lower inflation, lower inflation expectations, and lower nominal interest rates, and have found that one-time shocks to the price level have less of a "pass-through" effect on inflation. These effects, in turn, are improving the climate for economic growth. The authors warn, however, that the success of inflation targeting depends on operational details, such as how the targets are defined and when they are announced. They also show that inflation targeting is not a panacea that can make inflation perfectly predictable or reduce it without economic costs.

Clear, balanced, and authoritative, Inflation Targeting is a groundbreaking study that will have a major impact on the debate over the right monetary strategy for the coming decades. As a unique comparative study of what central banks actually do in different countries around the world, this book will also be invaluable to anyone interested in how economic policy is made.

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Editorial Reviews

Journal of Economics
Bernanke et al. provide a coherent and well-structured analysis of IT that will be essential reading for central bankers and academics interested in simply understanding IT, or contemplating an IT regime themselves. The volume is rich in detail about the individual experiences of the various inflation targeting countries.
Choice
This readable and well-structured examination of a relatively new approach to guiding monetary policy is a useful addition to contemporary policy analysis.
Weltwirtschaftliches Archiv (Review of World Economics)
A groundbreaking study that will be likely to have a major impact on the debate over the right monetary strategy for the coming years. As many countries currently think of adopting inflation targeting in one form or another, the arrival of this book could not be more timely.
Review of World Economics Weltwirtschaftliches Archiv

A groundbreaking study that will be likely to have a major impact on the debate over the right monetary strategy for the coming years. As many countries currently think of adopting inflation targeting in one form or another, the arrival of this book could not be more timely.
From the Publisher

"Bernanke et al. provide a coherent and well-structured analysis of IT that will be essential reading for central bankers and academics interested in simply understanding IT, or contemplating an IT regime themselves. The volume is rich in detail about the individual experiences of the various inflation targeting countries."--Journal of Economics

"A groundbreaking study that will be likely to have a major impact on the debate over the right monetary strategy for the coming years. As many countries currently think of adopting inflation targeting in one form or another, the arrival of this book could not be more timely."--Weltwirtschaftliches Archiv, Review of World Economics

"This readable and well-structured examination of a relatively new approach to guiding monetary policy is a useful addition to contemporary policy analysis."--Choice

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Product Details

  • ISBN-13: 9780691086897
  • Publisher: Princeton University Press
  • Publication date: 1/3/2001
  • Edition description: New Edition
  • Pages: 392
  • Product dimensions: 6.08 (w) x 9.20 (h) x 0.92 (d)

Table of Contents

List of Figures
Preface
Pt. 1 Inflation Targeting: The Issues 1
1 Introduction 3
2 The Rationale for Inflation Targeting 10
3 Issues of Design and Implementation 26
Pt. 2 Case Studies and Empirical Evidence 39
4 German and Swiss Monetary Targeting: Precursors to Inflation Targeting 41
5 New Zealand: Inflation-Targeting Pioneer 86
6 Canada: Inflation Targets as Tools of Communication 115
7 United Kingdom: The Central Bank as Counterinflationary Conscience 145
8 Sweden: Searching for a Nominal Anchor 172
9 Three Small Open Economies: Israel, Australia, and Spain 203
10 Inflation Targeting: How Successful Has It Been? 252
Pt. 3 Conclusions 285
11 What Have We Learned? 287
12 Inflation Targeting for the United States and the European Monetary Union 309
Notes 335
References 355
Index 367
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