• Monetary Targets and Tactics
  • Wealth Effects Reemerge
  • Is Japan Re-Thinking QE?


    As many employees do at the start of the year, last week I sat down with my boss to set targets for 2018. He insisted on keeping many of the objectives he had established last year: forecasts for all variables must be precisely accurate, I must present our commentary in six languages, and standing ovations are expected at all presentations. Standards are important, but these may be set too high.

    Most central banks have targets, too. And judged solely by the numbers, monetary policy would be assigned a substandard rating. Going forward, the question for monetary policy is whether to adjust targets or work harder to achieve those currently in place.

    Formal inflation targeting was first adopted by the Reserve Bank of New Zealand in 1989. Canada followed the next year, and the United Kingdom the year after that. The U.S. Federal Reserve ultimately adopted a target in early 2012.

    Inflation targeting has many merits. By providing an anchor, it improves the transparency of central bank decision-making, gives comfort to investors and provides forward guidance on how a central bank might react.

    Central banks in developed markets have deemed an inflation rate of 2% to be ideal for price stability. In order to avoid period bouts of deflation, there is a reluctance to set the target much lower than that; once in place, deflation can be difficult to dislodge, whereas a number of tools are available to tame excessive increases in the price level.

    The global symmetry of the 2% objective is interesting. Inflation can evolve differently in different places; this might have warranted some heterogeneity in global target levels. Central banks have, however, used the phrasing of their targets to create room to maneuver. Some give themselves ranges of acceptable outcomes; others give a vague time horizon over which compliance is to be achieved.

    The assessment of inflation is typically forward-looking, relying on a forecast of future price levels. Even if current readings are out of range, no immediate reaction is required if further inflation is expected to reach the desired state. Essentially, while targeting regimes may seem rigid on the surface, they allow for considerable discretion in their application.