Inflation Targets: Practice Ahead of Theory

Mervyn A. King

No 32594, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Inflation targets were introduced well ahead of the development of the theory of inflation targeting. The practice was successful because it comprised a new set of procedures and institutions for setting monetary policy in a transparent and accountable fashion – “constrained discretion”; the later theory was less useful because it purported to be a theory of the determination of the price level. But inflation targeting does not constitute a new theory of the monetary transmission mechanism. The belief that it does led to the replacement of Milton Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” by the new dictum that “inflation is always and everywhere a transitory phenomenon”. This had unfortunate consequences during the recent inflation. The paper concludes with a discussion of the challenges facing inflation targets in the future.

JEL-codes: E42 E43 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-ban, nep-cba, nep-his, nep-hpe and nep-mon
Note: ME
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