Practical Problems and Obstacles to Inflation Targeting

Abstract

If the FOMC were to adopt an explicit numerical inflation target, the vision of the resulting regime would have to fit both the political realities and the basic approach to monetary policymaking in the United States over the past decade. Indeed, the case for adopting an explicit inflation target in the United States is typically rationalized in terms of continuity rather than change. The key distinction essential for understanding the regime that would be a good fit for the United States is between inflation targets and inflation targeting. After explaining that distinction, the author offers his view of the vision of the Greenspan FOMC and considers the consistency of that vision with a regime with an explicit numerical inflation target. Next he considers the political climate for adopting an inflation target and other potential obstacles. The author concludes with a consideration of implementation details, as the choice is not ultimately between an explicit and implicit target in principle, but between the current practice and a specific alternative. Comments by Lars E. O. Svensson are presented.