South-Westerns' Economic News Summaries
Will Inflation Targeting Work?
Topic Employment, Unemployment and Inflation
Key Words

Inflation Targeting

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Reference ID: A138689404
News Story

At his Senate confirmation hearings, Ben S. Bernanke will have to fend off opponents who worry that his inflation-targeting policy preference is too focused on inflation and not enough on employment. Bernanke has raised this perception among his critics based upon some of his past observations on the matter.

For years, Bernanke has contended that the Fed should set monetary policy based on an explicit inflation target. Under such a system, the Fed would adopt a target range of acceptable inflation and then use monetary policy to hold inflation within this range. Bernanke has gone so far as to say that inflation should be held to 1 to 2 percent a year (excluding the fluctuations of energy and food prices—two major sources of inflation). Some Democratic lawmakers fear that Bernanke will focus solely on stable prices and not give enough attention to employment growth.

Bernanke argues that his pursuit of inflation targets and other predictable rules for policy making would actually lessen political influence on the Fed. He argues, further, that Fed policy would be less personalized, more open, and more predictable if it were based on explicit, publicly stated inflation targets.

His critics argue that the practice would be too rigid and would make it harder to deal with unexpected shocks in the economy. Others argue that inflation-targeting would conflict with the Fed’s dual mandate of working for both price stability and full employment in a balanced way.

In practice, Fed policy under Mr. Bernanke might not be different than it is under Alan Greenspan. Some analysts contend that the Fed already has an unstated inflation target of about 2 percent per year.

Questions
1.

Describe the process of inflation-targeting. What would you consider an opposite policy?

2. Discuss the notion of a Phillips Curve.
Source Edmund Andrews, “Inflation Issue to Dominate Questioning of Fed Nominee”, The New York Times Online, November 15, 2005.
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