How Flexible Can Inflation Targeting Beand Still Work?
by Kenneth N. Kuttnera and and Adam S. Posena,b
This paper takes up the issue of the flexibility of inflationtargeting
regimes, with the specific goal of determining
whether the monetary policy of the Bank of England, which
has a formal inflation target, has been any less flexible than
that of the Federal Reserve, which does not have such a target.
The empirical analysis uses the speed of inflation forecast convergence,
estimated from professional forecasters’ predictions
at successive forecast horizons, to gauge the perceived flexibility
of the central bank’s response to macroeconomic shocks.
Based on this criterion, there is no evidence to suggest that
the Bank of England’s inflation target has compelled it to be
more aggressive in pursuit of low inflation than the Federal
JEL Codes: E42, E58, E65.
(PDF, 35 pages 503 kb)
Discussion by Gauti B. Eggertsson
a Williams College Economics Department and the NBER
b Peterson Institute for International Economics and Monetary Policy Committee, Bank of England