Inflation Targeting in the World Economy

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Inflation Targeting in the World Economy

By Edwin M. Truman
Institute for International Economics, 2003
288 pp. $25.00
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A century ago, national currencies were linked to gold or silver. Starting in the 1930s, they were linked to major currencies, a practice formalized in 1944 at Bretton Woods. That system broke down in 1973, and ever since countries have floundered looking for a new "anchor" for monetary policy. The U.S. answer has been to appoint a committee of experienced individuals to manage the monetary aspects of the national economy. But that solution is not satisfying to some and, in any case, cannot work in countries with a history of monetary turbulence or a corrupt political culture. Since 1989, 22 countries have instead focused on targeting the domestic rate of inflation. Truman, a former official of the Federal Reserve, reviews the basic arguments for and against this kind of inflation-targeting and evaluates economic performance under such a system. He offers much useful discussion of the formulation of monetary policy by various central banks and how inflation influences the process. Truman emerges sympathetic to (but unenthusiastic about) inflation-targeting as a strategy.

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