The Failure of Inflation Targeting
Inflation targeting – the view that whenever price growth exceeds the target level, interest rates should be raised – is being put to the test by soaring global energy and food prices. It will inevitably fail, at great cost to those countries that maintain it, because imported inflation can be reduced only at the price of a sharp economic slowdown and high unemployment.
New York – The World’s central bankers are a close-knit club, given to fads and fashions. In the early 1980’s, 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.