Friday, July 21, 2006

Explicit numerical definition for the price stability objective

Not long after I wrote my last blog entry on "numerical inflation targeting," I ran into the term again. The news article I read criticized numerical inflation targeting (IT) and implied, once again, that Ben Bernanke supports this policy. I felt faint. Have I missed something? Have I been bemoaning the ill use of a phrase when it's actually a loose term that everyone but me knows not to take literally? Bullocks. I'm no prude.

Well, here's a telling excerpt from a speech given by Allan S. Blinder (Feb 2006):

This nomenclature issue is particularly important to the Federal Reserve because of its dual mandate to promote both “stable prices” and “maximum employment.” That may be why Ben Bernanke, while a Fed governor, decided not only to drop the IT name, but to state categorically that “what I am suggesting is not equivalent to inflation targeting.” That was a wise decision on his part. In the U.S. context, the term “inflation targeting” is a political and public relations burden and is therefore best dispensed with.

So, there you have it. The man even has a distaste for the term “inflation targeting.” So, my complaint isn't for nothing. Right? Well, now consider what Laurence Meyer had to say at the same event:

Janet Yellen takes a similar position. [She said,] “I, for one, am not a strict inflation targeter…and—as far as policy-makers go—I do not think I am in a minority. A natural next step for the FOMC is to announce an explicit numerical longrun inflation objective.”
Here again, the distinction is drawn between “inflation targeting” and announcing a definition of price stability.... It is therefore not surprising that the FOMC, in the minutes of the July 2005 FOMC meeting, describes the debate as being about whether or not to provide an explicit “numerical definition for the price stability objective.” The minutes never mention the words “inflation targets” or “inflation targeting.” The bottom line is that if Bernanke is to move the Committee towards an explicit numerical definition of inflation, he will have to differentiate it from the IT.

To sum up. Words not to be used to describe Bernanke's “framework”:
1. Numerical inflation targeting; and,
2. Inflation targeting. period.
The correct term: “explicit numerical definition for the price stability objective.”

No wonder supporters of a “price-targeting path” don't want to use Bernanke's terminology. The terminology itself would at first glance make their argument seem pithy to those who are confused about Bernanke's proposal (and I think it's safe to assume that most people are).
And finally, why the use of the term “explicit?” Is this misleading if Bernanke's proposal is to be a “flexible framework” where a path of targets are continuously revised (or at least reviewed) and dependent on the careful monitoring of economic indicators?
Meyer says,“The Fed...has the most explicit implicit inflation target in the history of central banking.” Does Bernanke advocate an “explicit implicit” target? I'm beginning to not care. It seems to me that a unique policy approach is being suffocated by terminology we find cozy.
From this post forward, the “explicit numerical definition for the price stability objective” will be
referred to as “Bernanke's proposed policy.” Which, by the way, is actually not “Bernanke's policy” - it was originally proposed by Meyer in 2001.
Are we sick yet?
There are some good discussions on Bernanke's proposal here. (link to Bank of Canada)

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