Inflation targeting is a monetary-policy strategy that is characterized by an announced numerical inflation target, an implementation of monetary policy that gives a major role to an inflation forecast and has been called forecast targeting, and a high degree of transparency and accountability. It was introduced in New Zealand in 1990, has been very successful in terms of stabilizing both inflation and the real economy, and has, as of 2010, been adopted by about 25 industrialized and emerging-market economies. The chapter discusses the history, macroeconomic effects, theory, practice, and future of inflation targeting.

I report some personal views and reflections on transparency experiences and transparency challenges following my first year and a half as Deputy Governor at Sveriges Riksbank regarding (1) flexible inflation targeting, (2) the role of transparency in inflation targeting, committee decisions on instrument-rate paths, (3) the management of interest-rate expectations, and (4) the publishing of attributed minutes. I also mention some future developments and improvements in transparency and flexible inflation targeting that I believe would be desirable.

and the Kumho Visiting Professorship, Yale University, for providing the time to write this paper. For several decades, John Taylor has advocated an ambitious program of research on quantitative rules that could serve as guidelines for monetary policy. While the comparative study of historical performance under alternative policies has helped to shape Taylor’s views (Taylor, 1999b), probably the most distinctive element of his approach to the problem has been his use of macroeconometric models for the nor-mative analysis of alternative policy rules (Taylor, 1979, 1993b, 1999c). In addition to his important contributions to the technical methods for the development, estima-tion, and numerical analysis of such models, Taylor has constantly been concerned with the issue of the robustness of policy proposals to model uncertainty (Taylor, 1999a), and with the distillation of the results of the research literature into a form that could influence actual policy (Taylor, 1993a, 1998). To what extent has the literature that Taylor has launched arrived at conclusions that are likely to help to improve the conduct of policy by central banks? In my view, the most important recent development with regard to the practical use of policy rules

Evaluating inflation-targeting monetary policy is more complicated than checking whether inflation has been on target, because inflation control is imperfect and flexible inflation targeting means that deviations from target may be deliberate in order to stabilize the real economy. A modified Taylor curve, the forecast Taylor curve, showing the tradeoff between the variability of the inflation-gap and output-gap forecasts can be used to evaluate policy ex ante, that is, taking into account the information available at the time of the policy decisions, and even evaluate policy in real time. In particular, by plotting mean squared gaps of inflation and output-gap forecasts for alternative policy-rate paths, it may be examined whether policy has achieved an efficient stabilization of both inflation and the real economy and what relative weight on the stability of inflation and the real economy has effectively been applied. Ex ante evaluation may be more relevant than evaluation ex post, after the fact. Publication of the interest-rate path also allows the evaluation of its credibility and the effectiveness of the implementation of monetary policy.

There have been three great inventions since the beginning of time: fire, the wheel, and central banking,-- Will Rogers Victorians heard with grave attention that the Bank Rate had been raised. They did not know what it meant. But they knew that it was an act of extreme wisdom. John Kenneth Galbraith My assignment is to survey the main questions swirling around monetary policy today. I emphasize three words in this sentence, each for a different reason. “Main ” is because one person’s side issue is another’s main issue. So I had to be both selective and judgmental in compiling my list, else this paper would have been even longer than it is. “Policy ” indicates that I have restricted myself to issues that are truly relevant to real-world policymakers, thus omitting many interesting but purely academic issues. “Today ” means that I focus on current issues, thus passing over some illustrious past issues. All these omissions still leave a rather long list; so I will treat some issues quite briefly. I have compiled a list like this once before. In December 1999, at what I

What have economists learned about monetary policy over the past 50 years? In economic research, 50 years is a long time. I will actually start in 1967, with Milton Friedman’s presidential address at the meeting of the American Economic Association, so I will only cover about 40 years. I will give a very personal view of what economists have learned since Friedman’s address that is most relevant for practical monetary policy. In order to be brief, I will have to leave out many important research contributions. I will hence be very selective, eclectic, and possibly controversial. 1 Friedman’s “The role of monetary policy ” – a classic The title of Friedman’s presidential address was “The role of monetary policy. ” It was presented on 29 December 1967, and published in the American Economic Review in 1968 (Friedman 1968). It remains a classic and a milestone in the development of a modern monetary-policy framework. Friedman discussed what monetary policy cannot do, what it can do, and how monetary policy should be conducted. Regarding what monetary policy cannot do, he noted that it cannot in the long run control real variables such as unemployment and GDP; in the long run it can only control nominal variables, such as the exchange rates, the price level, or monetary aggregates. These insights were not obvious at the time, but they are now part of the conventional wisdom.

The development of the Riksbank’s transparency and communication since its independence in 1999 is reviewed. The Riksbank’s record on the management of market expectations of future policy rates after the publication of policy-rate paths in February 2007 is examined, with a focus on the exceptional deviations of market expectations from published policy-rate paths since April 2009. The possible explanations discussed include differing views of future economic developments, communication challenges associated with very low interest rates and perhaps exaggerated lower-bound problems. The consequences of such large deviations of market expectations may be severe and potentially imply a much more restrictive monetary policy than intended. Whether the Riksbank’s transparency and communication are sufficient for effective accountability and evaluation is assessed, and it is shown that tools are available for the effective real-time evaluation of the Riksbank’s policy. Some conclusions and suggestions for possible improvements in the Riksbank’s transparency and communication are offered. JEL Classification: E52, E58

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As usual, Chris Sims (2008a) has given us an interesting and thoughtful paper. Since the title of this session is “Expectations formation: beyond rational expectations, ” I will use most of the discussion to discuss some practical policy considerations about expectations formation beyond rational expectations that I have been confronted with at the Riksbank. I will make a couple of specific comments on Chris’s paper at the end of my discussion. I will first summarize the flexible inflation targeting that the Riksbank conducts and emphasize how expectations matter in monetary policy. Then I will give three examples of practical issues relating to expectations formation. The first is the Riksbank’s record so far of managing private-sector interest-rate expectations. The second is the consequence for the Riksbank’s repo-rate path of its recent downgrading of the CPIX core measure of inflation in favor of the CPI. The third is to what extent the recent increase in inflation expectations is a serious problem or not. Finally, I return to Chris’s paper and question his skepticism concerning the Phillips curve and his possible alternative to it.

The objective of this note is to review recent thinking about central bank transparency and communications, with a particular focus on the pros and cons of greater economic transparency – that is, transparency about the central bank’s outlook for the economy – and on the limits of political transparency – that is, the ability of central banks to be clear about the objectives of the central bank. The first point to note is that there has been a wide spread adoption of greater transparency among central bank, and this holds true for formal inflation targeting central banks and for central banks that have not formally adopted inflation targeting. Dincer and Eichengreen (2007) have developed an index of central bank transparency which they construct for 100 central banks. 1 I focus on a subset 63 of these countries (I exclude Africa and several very small – generally island – nations). The horizontal axis of Chart 1 gives the value of the Dincer‐Eichengreen transparency index in 1998, while the vertical axis measures the value in 2005. Black triangles are non‐inflation targeters, red diamonds are inflation targeters. Several conclusions are illustrated by the chart: