WHAT TYPE OF INFLATION TARGET
2007; Cato Institute; Volume: 27; Issue: 2 Linguagem: Inglês
ISSN
1943-3468
Autores Tópico(s)Global Financial Crisis and Policies
ResumoFor much of monetary history, targeting was unnecessary. (1) There was no need to worry about constraining the central bank's inflationary proclivities because no central bank existed. The quantity of basic money was by the mints' commitment to full-bodied gold and silver coinage (at least where the mint-owners lacked monopoly status or chose not to exploit that status through debasement). The quantity of bank-issued money was by the commercial banks' commitment to gold- and silver-redeemability for banknotes and deposits. Together these commitments prevented excessive monetary expansion and thereby price inflation. (2) Today (since 1971) the commitments are gone, and a substitute is needed. Constraining Central-Bank Discretion Inflation targeting has been much discussed in recent years as a proposal for constraining the Federal Reserve's monetary policy-making. As proposed constaints on central banking go, it is relatively weak. Inflation targeting doesn't abolish the central bank, and--at least in the well-known version recommended by Bernanke et al. (1999)--doesn't even fasten a strict rule on it. In both the Bernanke version and in the versions actually practiced in other developed countries, the central bank authorizes within a range of positive rates, typically 1 to 3 percent. At the midpoint rate of 2 percent, is higher than experienced historically commodity-standard regimes, and is too high to promote optimal money-holding. As David Laider (2006: 3) has recently pointed out, A 2 rate is a far cry from anyone's (or at least any retiree's) idea of price-level stability: this seemingly low rate in fact reduces the purchasing power of a fixed-money income at a noticeable pace ... over the duration of the current 'low inflation regime [since 1991 Canada has had an target of under 2 percent and an average rate of 2 per year] the [Canadian] dollar has lost a quarter of its purchasing power. But, to emphasize the half-full part of the glass, 2 is better than 10 inflation, and a predictable 1 to 3 is better than an unpredictable 2 to 20 percent. Even if, in Bernanke's language, targeting is a framework for constrained discretion rather than a rule, it is nonetheless a small step toward a rule for constraining the central bank, and constraining the central bank is a step toward the first-best regime of doing without a central bank. I would characterize Bernanke-style targeting as an overly timid step in the right direction. My fear is not that targeting will the Fed's hands too tightly, but that it will perpetuate our long-standing failure to tie them tightly enough. Under the present discretionary regime, we don't know what monetary policy to expect. At his confirmation hearing, Ben Bernanke told the Senate Banking Committee: With respect to monetary policy, I will make continuity with the policies and policy strategies of the Greenspan Fed a top priority. No doubt Bernanke meant to reassure us. Unfortunately, we never knew what Greenspan's policy strategy was, and in his confirmation hearing Bernanke didn't tell us. Given that Bernanke, in contrast to Greenspan, has been an outspoken advocate of explicit targeting, it will be interesting to see whether Bernanke will actually move to implement targeting. Skeptics may note that Greenspan in his younger days was an outspoken advocate of the gold standard, but as Fed chairman he never took any steps toward re-instituting it. On the other hand, Greenspan reportedly commented once in a Congressional hearing that he would have been the only member of the Board of Governors favoring a return to gold. (3) Bernanke doesn't have the problem of being in a minority of one, particularly since his co-author Frederic Mishkin has joined the Board and the last of the Clinton appointees has departed. …
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