Many Targets, Many Instruments: Where Do We Stand?
Thank you to the International Monetary Fund for allowing me to take part in what I expect will be a very lively discussion. 1  Only five or six years ago, there wouldn ’ t have been a panel on the “ many instruments ” and “ many targets ” of monetary policy. Before the financial crisis, the focus was on one policy instrument: the short-term policy interest rate. Although central banks did not uniformly rely on a single policy target, many adopted an “ inflation targeting ” framework that, as the name implies, gives a certain preeminence to that one objective. Of course, the Federal Reserve has long been a bit of an outlier in this regard, with its explicit dual mandate of price stability and maximum employment. Still, the discussion might not have gone much beyond “ one instrument and two targets ” if not for the financial crisis and its aftermath, which have presented central banks with great challenges and transformed how we look at this topic. Let me start with a few general observations to get the ball rolling. In terms of the targets, or, more generally, the objectives of policy, I see continuity in the abiding importance of a framework of flexible inflation targeting. By one authoritative account, about twenty-seven countries now operate full-fledged inflation-targeting regimes. 2 The United States is not on this list, but the Federal Reserve has embraced most of the key features of flexible inflation targeting: a commitment to promote low and stable inflation over a longer-term horizon, a predictable monetary policy, and clear and transparent communication. The Federal Open Market Committee (FOMC) struggled for years to formulate an inflation goal that would not seem to give preference to price stability over maximum employment. In January 2012, the committee adopted a “ Statement on Many Targets, Many Instruments: Where Do We Stand?
State of the art of inflation targeting
Inflation targeting has been adopted by an increasing number of central banks as their monetary policy framework. At the start of 2010, some twenty seven central banks were considered fully fledged inflation targeters, and many others are in the process of establishing a full inflation-targeting framework. In this Handbook we publish details of the key features of the inflation-targeting frameworks in each of the 27 inflation targeting central banks around the world. These data enable us to analyse the state of the art of inflation targeting: the legal and institutional arrangements; the design of the inflation target; the decision-making body and process of decision-making; the models and forecasts used by central banks; the accountability mechanisms in place, and the communication and publication strategies. This handbook was written in June 2009 and updated in 2012.
Monetary policy transparency and private sector forecasts: evidence from survey data
In recent years, central banks around the world have greatly increased the monetary policy information they have provided the public. The Federal Reserve has taken a number of actions to promote transparency including, most recently, the announcement of enhancements to the FOMC's (Federal Open Market Committee) economic forecasts that are released to the public. ; The movement toward increased transparency arises largely from the view that increased transparency has important benefits, including more effective monetary policy. This view is based on theoretical and empirical research that has emphasized the importance of public expectations about monetary policy as a key factor in determining interest rates and other asset prices. In particular, this research suggests that improved predictability of monetary policy may reduce the volatility of asset prices and make monetary policy more effective by increasing a central bank's leverage over longer-term interest rates. ; Sellon uses information from the Blue Chip Long Range Financial Forecasts to examine whether longer-horizon predictability has been associated with increased transparency. The analysis suggests several interesting conclusions. First, consistent with previous studies using futures data, there has been a marked reduction in survey forecast errors at short-term horizons. But, the survey data suggest there has been much less improvement at longer horizons. Second, to the extent private sector longer-horizon forecasts of future monetary policy have improved in recent years, most of the improvement occurred from 2003 to 2006, when the Federal Reserve provided more explicit guidance about the future path of the federal funds rate. During this period, forecast errors over all horizons dropped remarkably. Indeed, this period appears to have driven most of the improvement in the Blue Chip survey forecasts seen over the entire 1986-2007 sample period. Third, the survey evidence reported in this article does not support the finding of some studies that forecasting improved suddenly after 1994. Fourth, the longer-horizon forecast errors have been largest when policy was being actively tightened or eased, especially during the 1990-92 and 2001-03 periods of extended policy easing. Finally, longer-horizon forecast errors appear to have diminished during periods of tightening, but not during periods of easing.