DP9756 Some Lessons from Six Years of Practical Inflation Targeting

Author(s): Lars E.O. Svensson
Publication Date: November 2013
Keyword(s): financial stabiilty, household debt, inflation targeting, Monetary policy
JEL(s): E42, E43, E44, E47, E52, E58
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9756

My lessons from six years of practical policy-making include (1) being clear about and not deviating from the mandate of flexible inflation targeting (price stability and the highest sustainable employment), including keeping average inflation over a longer period on target; (2) not adding household debt as a new (intermediate) target variable, in addition to inflation and unemployment ? not ?leaning against the wind,? which is counterproductive, but leaving any problems with household debt to financial policy; (3) using a two-step algorithm to implement ?forecast targeting?; (4) using four-panel graphs to evaluate monetary policy ex ante (in real time) and ex post (after the fact); (5) taking a credible inflation target and a resulting downward-sloping Phillips curve into account by keeping average inflation over a longer period on target; and (6) not confusing monetary and financial policy but using monetary policy to achieve the monetary-policy objectives and financial policy to maintain financial stability, with each policy taking into account the conduct of the other.