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Inflation Targeting: Lessons from the International Experience. By Ben S. Bernanke, Thomas Laubach, Frederic S. Mishkin, and Adam S. Posen. Princeton: Princeton University Press, 1999. Pp. 382. $24.95. ISBN 0-691-05955-1.
Inflation targeting has been steadily gaining momentum as a way to conduct monetary policy. In the mid-1990s, seven countries (New Zealand, Canada, the UK, Sweden, Israel, Australia, and Spain) converted to inflation targeting; and Japan has announced that it intends to adopt this regime. Worldwide, the United States and the European Union remain the major holdouts.
This book examines inflation targeting in three ways. First, it gives a rationale for targeting inflation and addresses issues of policy design. Second, it chronicles the recent experience of nations operating under this regime. Germany and Switzerland are also included, since the authors argue that their monetary policies correspond to targeting inflation. Finally, after assessing the evidence, the authors lay out a program for implementing inflation targeting in the United States and European Union.
Chapters 1-3 make up the first part of the book. Chapter 2 sets forth several reasons for inflation targeting. One of these, the inability of activist monetary policy to effect predictable and long-lasting changes in output, strikes me as unconvincing. The authors make a case for this based on studies largely done between the late 1960s and early 1980s; they do not include much recent work on this issue.
As a related point, the authors include no discussion of the difficulties finding a credible empirical linkage between monetary policy and inflation. They rely exclusively on a general belief in the long-run relationship. Scientific evidence, though, indicates that one cannot be so casual. In particular, the authors do not address the "price puzzle" found by Sims [1992] and Eichenbaum [1998]. Using an estimated vector autoregressive (VAR) model, Sims and Eichenbaum find an anomalously negative relationship between monetary policy and inflation. A balanced assessment of the potential for inflation targeting needs to include this argument.
Chapter 3 examines the design and implementation...