Missing the Mark: The Truth About Inflation Targeting

James K. Galbraith takes our book, Inflation Targeting: Lessons from the International Experience, as the jumping-off point for a screed against obsession with price stability ("The Inflation Obsession: Flying in the Face of the Facts," January/February 1999). He does Foreign Affairs readers a disservice by misrepresenting our argument and, as a result, leaves them uninformed about perhaps the most important current debate on the conduct of monetary policy.


Inflation targeting -- and our "manifesto" in favor of it (to use Galbraith's characterization) -- is not so much about the objectives of monetary policy as about its implementation, particularly the way in which monetary decisions are made and explained. Neither the inflation-targeting regimes adopted by countries such as Australia, Canada, Israel, New Zealand, Spain, Sweden, and the United Kingdom nor the arguments advanced in our book commit inflation targeters to a destructive, single-minded focus on inflation in the short term. To the contrary, the features that accompany such systems -- namely, the added transparency and accountability of central banks that have publicly announced inflation targets -- are the best guarantees against policy mistakes. This is why the European Central Bank and the Federal Reserve Board should adopt these measures.

Galbraith is too concerned with demolishing a straw man to pay much attention to what our book actually says. He asserts, for example, that "the authors of Inflation Targeting do not discuss the Humphrey-Hawkins Act," the U.S. legislation most closely addressing the Fed's mandate and accountability. If Galbraith had glanced at our index, he would have seen that we actually have a three-page discussion of Humphrey-Hawkins in the context of our recommendations for enhancing the transparency of the Fed's operations. A little later, he dismisses our argument that inflation-targeting countries have enjoyed improved economic performance: "A fair evaluation of this claim would require a comparative perspective, which the authors do not provide." Yet our book contains 9 country studies spread over 163 pages, plus a chapter comparing the economic performance of 4 inflation-targeting countries to that of 4 nontargeting countries. What does this provide if not "a comparative perspective," and a fair one at that?


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