Working Paper: NBER ID: w30012
Authors: Robert G. King; Yang K. Lu
Abstract: In his 2004 inflation targeting manifesto, Marvin Goodfriend described US monetary policy as implicit inflation targeting and advocated explicit targeting. Summarizing the 1965-2000 US inflation experience, he highlighted the importance of evolving Fed credibility, which accords with our recent work using a quantitative New Keynesian model. We define credibility as policy consistency with a publicly announced framework and develop two lessons theoretically. First, under explicit targeting, no conflict arises between flexible inflation targeting and maintaining/accumulating credibility. Second, implicit targeting reduces the effectiveness of expectations management and stabilization policy, as well as opening the door to costly inflation scare episodes
Keywords: inflation targeting; credibility; monetary policy
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| explicit inflation targeting (E31) | credibility (D83) |
| implicit inflation targeting (E31) | lower credibility (D80) |
| lower credibility (D80) | decreased effectiveness of expectations management (D84) |
| decreased effectiveness of expectations management (D84) | inflation scare episodes (E31) |
| communication of inflation targets (E52) | improved credibility (L15) |
| improved credibility (L15) | better stabilization outcomes (C62) |