Friday, February 15, 2013

Mark Carney - "flexible inflation targeting"

In hearings concerning his appointment as governor of the Bank of England, Mark Carney outlined his monetary policy views as "flexible inflation targeting". Flexible inflation targeting will now be the new buzz words for central bankers. 

Flexible inflation targets suggests that the inflation target should be hit in the medium term but in the shorter-term other goals need to be integrated which would allow for variation in inflation away from the target. These other goals would include welfare issues, employment gains, and financial stability. When goals are at odds, vary the horizon  to account for such things as macro prudential regulation. 

This seems to make sense on the surface, but the flexibility rule means that there would not be any way to determine what would be the goals of the central bank. The goals and targets would be adjusted to meet different horizons and objectives with little clarity for the markets for what will be the overall goal of the central bank. Of course, central banks want to have the flexibility to undertake contingency planning but it is certainly not the case that this would reduce uncertainty. In fact, many central banks viewed that they had the mandate to be flexible. There has been very little talk that the financial crisis was a direct result of inflexible policies by central banks to hit inflation targets. 

Flexible inflation targeting is dangerous. There will be more focus on what central banks say and on trying to read the signals of central banks and less on the real economy. How would this be a good thing?  

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