Following the turbulence of the 1970s, much improved economic conditions lasted for some 25 years, a period known as the Great Moderation. With their damaged reputations restored, central banks kept inflation low and brought down interest rates. With research showing an inverse relationship between central bank independence and inflation, a world-wide movement to granting autonomy to the money masters ensued. This successful process was much enhanced by central banks, most of whom had abandoned targeting the exchange rate or the money supply, adopting symmetric inflation targeting. Directly aiming at keeping inflation at a modest level, while avoiding deflation, became best practice. Gearing monetary policy toward anchoring inflation expectations, aided by increased transparency and better communication, proved to be a fruitful approach. Inflation targeting is one area where academics and policymakers were in agreement.
CITATION STYLE
Central Banking and the Great Moderation. (2020). In The Money Masters: The Progress and Power of Central Banks (pp. 117–144). Springer International Publishing. https://doi.org/10.1007/978-3-030-40041-5_9
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