Is Inflation Targeting Best-Practice Monetary Policy.pdf

Is Inflation Targeting Best-Practice Monetary Policy? Jon Faust and Dale W. Henderson 1. INTRODUCTION ranking the ITF relative to some set of ad hoc alter- natives, such as the current practices at central banks he core requirements of inflation targeting around the world. Tare an explicit long-run inflation goal and a Of course, the ITF community is now large and strong commitment to transparency. The varied. We focus mainly on the industrialized coun- framework built around these requirements has tries. One might say that we consider the role of much to recommend it. Inflation and output per- the ITF in a low-inflation steady-state and do not formance in economies using the inflation-targeting address the important question of how it might help framework (ITF) has been good by historical stan- in reaching such a steady-state. In much of the paper dards, and both governments and central banks we seek to highlight some generic issues. In doing claim to be pleased with the framework. Advocates so, we do not mean to suggest that there are not and practitioners of the ITF have been leaders in important differences among the practices of ITF shaping and exploiting the new consensus that central banks: Our points will apply in varying central bank transparency can make policy more degrees to ITF and other central banks.1 effective. Not only are ITF central banks among Our main message can be summarized suc- the most transparent in the world, they have experi- cinctly. Common wisdom and conventional models mented