Why the Federal Reserve Should Not Adopt Inflation Targeting

Abstract

Inflation targeting has become one of the most significant developments of recent decades in both the theory and the practice of monetary policy. A rapidly expanding literature has analysed the a priori properties of various ‘inflation targeting’ strategies, and an increasing number of central banks around the world ‐ the Bank of Canada, the Bank of England, the Swedish Riksbank, and numerous others ‐ have adopted one form or other of this strategy as the basic framework governing the formulation and implementation of their respective monetary policies. It is hardly surprising that we now see frequent calls for the Federal Reserve System to join the parade and restructure US monetary policy too, within the guidelines of some form of inflation-targeting rubric. I urge our policy makers at the Federal Reserve to reject those calls. The empirical case for the value added by inflation targeting in terms of a country’s macroeconomic performance, especially for a country that is already experiencing low inflation to begin with, is unproved to say the