Inflation Targeting Hits the Wall

By Anthony P. Mueller

 

The financial-market crisis is not over but has grown into a vicious sovereign-debt crisis. Nevertheless, monetary policy makers of the major economies go on to practice the same sort of policy that has led to the crisis. Following the model of inflation targeting, they continue to disregard the quantity of money and the amount and kind of credit creation. As they did before, central bankers cut interest rates as low as they can. Few seem to remember that the monetary-policy concept of inflation targeting was adopted with the promise that low and stable inflation rates would produce financial and economic stability. Reality has not confirmed this assurance. On the contrary, inflation targeting was instrumental in bringing about the current financial crisis.

 

What Is Inflation Targeting?

A central bank that pursues an inflation-targeting monetary policy model would raise the policy interest rate (which in the case of the United States is the federal-funds rate) when the current price-inflation rate tends to move beyond the target and to reduce the policy interest rate when the rate tends to fall below the range. Operationally, the inflation rate is the target variable of this approach while the policy interest rate serves as the instrument variable. Different from monetarism, the monetary aggregates play only a secondary or no role at all in the inflation-targeting model.

 

The monetary policy model of inflation targeting can be… (Read on)

 

Source: Mises.org