Working Papers

The End of Inflation Targeting?

The leader of the opposition New Zealand Labour Party, Phil Goff, has announced the abandonment of his party’s support for inflation targeting by the Reserve Bank of New Zealand.

It was a Labour government that introduced the Reserve Bank of New Zealand Act in 1989, making New Zealand a global pioneer in the practice of inflation targeting.

I have long suspected that the global trend towards increased central bank independence and inflation targeting would eventually be reversed.  As I noted in my Bubble Poppers monograph, even the central banking community is increasingly divided on the issue. 

If the bipartisan consensus in favour of inflation targeting can be shattered in New Zealand, it can happen anywhere.

posted on 19 November 2009 by skirchner in Economics, Financial Markets, Monetary Policy

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The interesting thing is that while the academic debate about inflation targeting seems to be about whether there is a need to run tighter monetary policy by ‘leaning against the wind’ to curb asset price rises, the reason why NZ Labour has abandoned targeting is the view that targeting harms growth - ie being too contractionary. At the same time, the US Fed looks very unlikely to pre-emptively tighten policy on account of ‘bubbles’ or anything else. So are we seeing an attack on inflation targeting from both ends?

Posted by .(JavaScript must be enabled to view this email address)  on  11/19  at  06:30 PM

Lets hope it doesn’t come to this.  Definitely not happy with the opposition today.

Posted by Matt Nolan  on  11/20  at  03:02 PM

Common sense tells us that an inflation target, in the long run at least, will effectively have to be a quantity target anyway.

The conclusion, then, is that there is no such thing as “inflation” targeting, just “quantity growth targeting by laggy quarterly proxy of questionable value”.

Posted by benson  on  11/21  at  12:41 AM

Benson, that conclusion does not follow from the first statement (which I agree with).

The purpose of keeping inflation in a band is so that people know what “general price growth” is - it is about managing inflation expectations.  By doing this we ensure that people accurately understand what relative prices are, and so can make the best choices possible.

Posted by Matt Nolan  on  11/24  at  11:42 AM

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