Friday, March 6, 2009

The Death of Inflation Targeting

Inflation "IT" Targeting
A loyal server of the Bank of England
* 1992
+ 2009


The Bank of England, one of the pioneers of inflation targeting (IT), until recently a much praised monetary policy framework (one that, by the way, I helped to implement in Brazil), decrees the death of the regime (italics are mine):

Inflation targeting was introduced in 1992 with the aim of enhancing economic stability and making policy decisions more transparent. When Labour took office in 1997, Gordon Brown took that policy farther by making the Bank responsible for setting interest rates. Mr Brown also split responsibility for monetary policy from banking supervision, which he vested in the the new Financial Services Authority (FSA). ...

The derelictions start with these. Monetary policy failed. The Bank's mandate of targeting inflation proved too narrow. It focused on consumer prices but overlooked asset prices. Cheap imports from China helped to dampen inflationary pressures and let the Bank keep interest rates low. But a massive bubble in house prices, fuelled by imprudent lending, was left unconstrained. The Bank was so consumed with its monetary responsibilities that it failed in its task of securing financial stability. ...

The British financial system is dysfunctional and has damaged the wider economy. Mr Brown is its author. It might hasten necessary repairs if he were to acknowledge those errors.

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