Abstract:
Inflation targeting has become the predominant monetary approach across the globe. In a very real sense, “we are all inflation targeters now.” Before, during, and after the financial crisis, nearly all Central Banks following an inflation-targeting approach—whether explicit or implicit—have been highly successful at achieving price stability and anchoring inflation expectations. Recent events, however, highlighted two critical issues for inflation targeting going forward: the constraint of the zero lower bound on nominal interest rates and the appropriate role of monetary policy in supporting financial stability. This has led to the development of alternative approaches to inflation targeting that offer, in theory, potential advantages with respect to the zero lower bound and financial stability.
Machine summary:
In response to the growing level of debt and the subsequent potential risks to financial stability, the central bank of Sweden took a somewhat tougher stance than usual monetary policies and solely under special macroeconomic conditions in the fore In summary, based on broader historical experience and the potential for interest rates to reach levels below the natural interest rate, the zero lower bound interest rate range will likely be a specific issue for central banks in targeting low inflation levels.
Looking ahead, conditions may be different; commodity prices may not boom as they did during the global financial crisis, and global growth trends and real interest rates may be lower, and consequently, the zero lower bound interest rate range may pose more tangible constraints on monetary policy even in emerging market economies.
Central banks have turned to unconventional policies by reducing the zero lower bound constraint on interest rates, but even with these interventions, inflation in several countries has still been continuously driven below target levels in the post-crisis period.
" All central banks, by following the inflation targeting approach—whether explicit or implicit—have been quite successful in achieving price stability and anchoring inflation expectations before, during, and after the financial crisis; however, recent events have highlighted two important issues within the framework of continuing inflation targeting: first, the zero lower bound constraint on nominal interest rates, and second, the role of appropriate monetary policy in supporting financial stability.
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