Why Inflation Targetting Sux
THE world’s central bankers are a close-knit club, given to fads and fashions. In the early 1980s, they fell under the spell of monetarism, a simplistic economic theory promoted by Milton Friedman. After monetarism was discredited — at great cost to those countries that succumbed to it — the quest began for a new mantra.
The answer came in the form of “inflation targeting”, which says that whenever price growth exceeds a target level, interest rates should be raised. This crude recipe is based on little economic theory or empirical evidence; there is no reason to expect that regardless of the source of inflation, the best response is to increase interest rates. One hopes that most countries will have the good sense not to implement inflation targeting; my sympathies go to the unfortunate citizens of those that do…
Today, inflation targeting is being put to the test — and it will almost certainly fail.M