by Christian Gillitzer and John Simon
Reserve Bank of Australia
Since the introduction of inflation targeting, inflation expectations have become firmly anchored at target and there has been a flattening of the Phillips curve. These changes mean that a "divine coincidence" between headline inflation and output-gap stabilization is less apparent than when inflation targeting was introduced. This has led some to call for a fundamental reengineering of inflation-targeting regimes: either adopting explicit dual mandates or replacing headline inflation with a target inflation measure more closely related to domestic output gaps. We argue instead for an evolution in the practice of CPI inflation targeting. In practice, many central banks have already moved in this direction with the adoption of flexible inflation-targeting frameworks.
JEL Codes: E31, E52, E58.
Full article (PDF, 29 pages, 1070 kb)
Discussion by Alexander L. Wolman