The ideal framework for monetary policy?


No discernable benefits. No harm done.


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Many economists strongly advocate inflation targeting as a framework for conducting monetary policy.

Under this approach, first adopted by New Zealand in 1989, countries make an explicit commitment to meet a specified inflation rate target or target range within a certain time frame. Proponents of inflation targeting cite its many potential benefits-it can lower average inflation, stabilize output, and lock in expectations of low inflation, which can reduce the inflationary impact of macroeconomic shocks. But is there hard evidence yet that inflation targeting really has helped improve inflation, output, and interest rate performance? A study by Laurence Ball (Professor of Economics, Johns Hopkins University) and Niamh Sheridan (Economist, IMF Institute) argues that the early evidence is inconclusive. They suggest greater experience may be needed before a definitive answer can be reached.

What does experience have to say about the relative merits of inflation targeting? Ball and Sheridan examine 20 industrial, moderate-inflation economies- 7 that adopted inflation targeting during the 1990s (Australia, Canada, Finland, New Zealand, Spain, Sweden, and the United Kingdom) and 13 that did not (Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Switzerland, and the United States).

Because two of the latter group adopted inflation targeting fairly recently-Switzerland in 1999 and Norway in 2000-they are included as nontargeters ntil those dates and then dropped from the sample.

For each country, the beginning of targeting is defined as the first full quarter in which a specific inflation target or target range was in effect, with the target having been announced publicly at some earlier time. The public announcement is important, because many of the intended effects of targeting, such as those working through expectations, depend on agents knowing that they are currently in a targeting regime. The starting dates range from the third quarter of 1990 (New Zealand) to the second quarter of 1995 (Spain). The targeting period lasts through 2001, except for Finland and Spain, where it lasts through 1998 because of the advent of the euro.

Ball and Sheridan compare each country's performance during its targeting period to its performance during two pretargeting periods-a longer one that began in 1960 and a shorter one that began in 1985.


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