New paper (revised August 31, 2013): “Some Lessons from Six Years of Practical Inflation Targeting,” revised, August 31, 2013. Previous version prepared for the Riksbank conference on “Two Decades of Inflation Targeting: Main Lessons and Remaining Challenges,” June 3, 2013. Paper (revised).
Abstract
My lessons from six years of practical policy making include (1) being clear about and not deviating from the mandate of flexible inflation targeting (price stability and the highest sustainable unemployment), including keeping average inflation over a longer period on target; (2) not adding household debt as a new (intermediate) target variable, in addition to inflation and unemployment – not “leaning against the wind” but leaving any problems with household debt to financial policy; (3) using a two-step algorithm to implement “forecast targeting”; (4) using “four-panel graphs” to evaluate monetary policy ex ante (in real time) and ex post (after the fact); (5) taking a credible inflation target and a resulting downward-sloping Phillips curve into account by keeping average inflation over a longer period on target; and (6) not confusing monetary and financial policy but using monetary policy to achieve the monetary-policy objectives and financial policy to maintain financial stability, with each policy taking into account the conduct of the other.