LIMITSTOINFLATIONTARGETING-Simspagedata.pdfVIP

LIMITS TO INFLATION TARGETING CHRISTOPHER A. SIMS ABSTRACT. In?ation targeting may do more harm than good if there is a substan- tial chance that the central bank cannot in fact control in?ation. A prerequisite for central bank control of in?ation is appropriate coordination with or backup by ?s- cal policy, and the nature of the required coordination will depend on whether and how central bank independence from the ?scal authority has been implemented. These considerations suggest that in those countries where in?ation control has in the past been most dif?cult, in?ation targeting may be least useful. Where in?ation control has in the past been successful, the bene?ts of in?ation targeting may have more to do with the associated changes in the policy process and in the central bank’s communication with the public than with the in?ation target itself. I. THE TWO FACES OF INFLATION TARGETING Economists should recognize that they have a history of proposing simple “nom- inal anchor” prescriptions for monetary policy that have eventually proved not to be very useful. If economists satisfy a demand for spurious technocratic solutions to the political and institutional pathologies that generate destructive episodes of de?ation or in?ation, they can do harm by diverting attention from the sources of the problem. Such nostrums can also be harmful, usually with a delay, by failing to work, and thereby undermining the credibility of monetary policy. A cynical view might be that in?ation targeting has become attractive less because of advances in our discipline than because of the demand for a replacement for the gold standard, monetarism, and exchange rate anchors. There is some reason to hope, though, that in?ation targeting is a “better nos- trum”. This anchor is something that people do in fact